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Claims Made CGL Turned Into an Occurrence Policy on Public Policy Grounds.

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In a certified question from a federal court the Washington state Supreme Court was asked whether a contractor’s commercial general liability (CGL) insurance policy that requires the loss to occur and be reported within the same policy year and provides neither prospective nor retroactive coverage violates Washington’s public policy. In light of chapter 18.27 RCW, which regulates the registration of contractors, and specifically RCW 18.27.050, which requires registered contractors to carry at least $100,000 in financial responsibility for bodily injuries.

Certification From United State District Court For The Western District Of Washington In Preferred Contractors Insurance Company, Risk Retention Group, LLC v. Baker And Son Construction Inc., a Washington for-profit corporation; ANGELA COX, as Personal Representative of the Estate Of Ronnie E. Cox, deceased; Angela Cox, individually and as mother of G.C., a minor, No. 100466-4, Supreme Court of Washington, En Banc (August 11, 2022)

Cox Construction was the general contractor of a project to remodel the Roadway Motel in Long Beach, Washington. Cox hired Baker and Son Construction Inc. as a subcontractor. On October 31, 2019, a Baker employee allegedly caused a two-by-four to fall from a railing and strike Ronnie Cox, the owner of Cox Construction, in the head. Mr. Cox died in his sleep later that night. Baker allegedly called an insurance agent to alert them of the incident. The agent told Baker that no action needed to be taken because at that time no claim existed.

PCIC denied coverage of the claim but agreed to defend Baker under a reservation of rights. PCIC denied coverage for several reasons, but the reason relevant to the certified question involves the claims-made nature of the policy and the timing of Baker’s tender of Ms. Cox’s claim.

Facts and Procedural History

There are two common types of CGL policies: occurrence policies and claims-made policies. Generally, liability attaches in occurrence policies when an insured event happens during the policy period. On the other hand, liability usually attaches in a claims-made policy when the claim is reported to the insurer within the policy period.

PCIC had issued two CGL policies to Baker. These were claims-made policies. However, the insuring agreement provided coverage with language similar to an occurrence policy. The claims-made features of the policies were added in a “claims-made and reported limitation” endorsement, limiting coverage to bodily injuries that occurred and were reported to PCIC within the policy period.

These endorsements also provided there was no continuous coverage between policies that were renewed, limiting each policy period to one year. Because Mr. Cox’s death occurred in October 2019 and Ms. Cox did not notify Baker of her intent to sue until September 2020, the occurrence and reporting dates did not occur in the same policy period. The 2019 policy did not cover the claim because it was not reported within the policy period, and the 2020 policy did not provide coverage because the occurrence the claim arose from happened before the policy period began on January 5, 2020.

Ms. Cox filed her wrongful death claim in Pacific County Superior Court on November 12, 2020. PCIC filed a declaratory action in the United States District Court for the Western District of Washington on January 7, 2021, seeking a declaration that it had no duty to defend or indemnify Baker for Mr. Cox’s death. PCIC filed a motion for summary judgment and Ms. Cox, joined by Baker, filed a motion for certification to this court. The district court denied PCIC’s motion and partially granted Ms. Cox and Baker’s motion. The certified question in full asks:

Whether a liability insurance policy providing only coverage for “occurrences” and resulting “claims made and reported” that take place within the same one-year policy period, and providing no prospective or retroactive coverage, violates Washington public policy and renders either the “occurrence” or “claims-made and reported” requirement unenforceable.
Analysis
Background on Occurrence and Claims-Made Insurance Policies

Most claims-made policies are effective from a set “retroactive date.” The retroactive date can be set for before the policy period to prevent a gap in coverage when the insured switches between insurers or from an occurrence policy to a claims-made policy. However, it is more common to set the retroactive date as the first day of the claims-made policy period and retain that retroactive date across policy renewals to prevent gaps in coverage.

Claims-made policies that reset the retroactive date to the start of each new policy period are called nonretroactive claims-made policies
Public Policy

Chapter 18.27 RCW Provides a Statutory Basis for Washington Public Policy to Promote Contractors’ Financial Responsibility for Bodily Injuries

Insurance policies are private contracts, and parties are ordinarily free to exercise their freedom of contract to limit the liability covered in the policy. However, the Washington Supreme Court will refuse to enforce an insurance provision if it is contrary to public policy. Ms. Cox and Baker rely on chapter 18.27 RCW to establish a public policy of ensuring contractors are financially responsible, primarily through insurance, for losses caused by their negligence. RCW 18.27.050(1) requires contractors to have insurance or financial responsibility to cover $100,000 “for injury or damage including death to any one person” to obtain registration with the state. This chapter also states an explicit 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.” RCW 18.27.140.

In this case, the registration of contractors act clearly states a registered contractor must be financially responsible for at least $100,000 of a person’s bodily injury or death. The legislature explicitly says the purpose of the chapter is to “afford protection to the public” from “unreliable . . . or incompetent contractors.”

Most contractors, by statute, are required to secure insurance to comply with the registration requirements. As a result, these statutes articulate a public policy that contractors must provide financial compensation, preferably in the form of insurance, to the members of the public they injure.

Ms. Cox is alleging wrongful death, so it is irrelevant that Mr. Cox and Baker were in privity with each other because the negligence claim is not covered by the bond provision. RCW 18.27.050 and RCW 18.27.140 articulate the legislature’s intent to create a public policy of ensuring contractors are financially responsible for injuries caused to members of the public by their negligence. Because chapter 18.27 RCW has established a public policy holding contractors financially responsible to members of the public, we must determine if the insurance provisions at issue violates this policy.
Nonretroactive Claims-Made Policies That Provide No Prospective or Retroactive Coverage Violate Public Policy

Having established that Washington has a public policy requiring contractors to be financially responsible to members of the public injured by their negligence,

Claims-made policies, while fundamentally different from traditional occurrence policies, generally do not violate public policy. However, the policies in this case are not pure claims-made policies because they do not provide retroactive coverage, not even for losses that occur during one policy period and are reported during a subsequent policy period.

The New Jersey Supreme Court observed 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. At the same time, 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.

The Supreme Court claimed it was mindful that parties to insurance contracts generally should have the freedom to contract. But when the legislature orders contractors to bear financial responsibility for the injuries their negligence may cause and dictates insurance is the preferable method to comply with this mandate, we cannot enforce insurance provisions that render coverage so narrow it is illusory. 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 issue policies that essentially cause contractors to default on their statutorily mandated financial responsibility. The insurance policies PCIC issued to Baker fail to provide prospective or retroactive coverage and create limited one-year windows for claims to occur and be reported to qualify for coverage. Such restrictive coverage violates Washington’s public policy. Therefore, the Supreme Court answered the certified question in the affirmative.

ZALMA OPINION

Through RCW 18.27.050 and RCW 18.27.140, the legislature has created a public policy wherein contractors must be financially responsible for the injuries they negligently inflict on the public. With such a public policy established, a contractor’s CGL policy that requires the loss to occur and be reported to the insurer in the same policy year and fails to provide prospective or retroactive coverage is unenforceable. We answer the certified question in the affirmative.

The Supreme Court of the State of Washington has spoken from both sides of the bench. It claims that an insurer and insured have the right to contract as they please including the right to issue a claims made policy. However, in this situation the Court decided that because a statute requires a contractor to be financially responsible a claims made policy is in violation of the public policy of the state and required the insurer PCIC to protect the insured as it it was an “occurrence” CGL. It did not, however, consider requiring the insured to pay the premium for the more extensive coverage. This decision has changed a public policy into a forced rewriting of an insurance policy both parties agreed to and relied upon up to the limits of the coverage.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].

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