Ohio Supreme Court Holds Faulty Workmanship Is Not an Occurrence

-->

In its recent decision in Westfield Ins. Co. v. Custom Agri Systems, 2012 Ohio 4712 (Ohio Oct. 16, 2012), the Supreme Court of Ohio, answering a question certified by the United States Court of Appeals for the Sixth Circuit, had occasion to consider whether “claims of defective construction/workmanship brought by a property owner [are] claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.”  The court also had before it the certified question of whether the contractual liability exclusion applies to bar coverage for such claims.

The coverage dispute in Westfield arose out of Younglove Construction’s contract with PSD Development to build a feed-manufacturing plant in Sandusky, Ohio.  Younglove brought suit against PSD for non-payment of funds, which resulted in PSD filing a counterclaim for defective construction of a steel bin that had been built by Younglove’s subcontractor, Custom Agri Systems.  Younglove subsequently brought a third-party action against Custom, alleging defective construction and consequential damages resulting from the defective construction.  Custom, in turn, tendered its defense to its general liability insurer Westfield.  Westfield intervened in the lawsuit to seek a declaration that it had no coverage obligation to Custom, as Younglove’s third-party claim did not allege “property damage” arising out of an “occurrence.”  Westfield also sought a declaration with respect to the application of its policy’s contractual liability exclusion.   The Northern District of Ohio acknowledged that there was an open question under Ohio law as to whether construction defect claims qualify for coverage under general liability policies, but nevertheless granted summary judgment in Westfield’s favor.  The matter was appealed to the Sixth Circuit, which certified the question to the Ohio Supreme Court.

Citing to the Ohio Appellate Court decision in Heile v. Herrmann, 736 N.E.2d 566 (1st Dist.1999), as well as insurance treatises and case law from other states, the Ohio Supreme Court agreed with the general proposition that general liability policies are “not intended to protect business owners against every risk of operating a business,” nor are they “intended to insure the risks of an insured causing damage to the insured's own work.”  The court nevertheless stated that these general principles did not end the inquiry, but instead, the court was required to determine whether “Custom's alleged defective construction of and workmanship on the steel grain bin constitute ‘property damage’ caused by an ‘occurrence.’”

The court began its analysis with an overview of what constitutes an “occurrence,” defined by the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  It noted that the term “accident” was not defined by the Westfield policy, but that the term has an inherent “fortuity principle,” and thus is generally defined to mean “unexpected as well as unintended.”  Relying on the concept of fortuity, as well the decisions by lower Ohio courts and by the Arkansas Supreme Court in Essex Ins. Co. v. Holder, 37261 S.W.3d 456 (2008), the court concluded that faulty workmanship is not an occurrence for the purpose of a general liability policy, explaining:

… claims for faulty workmanship, such as the one in the present case, are not fortuitous in the context of a CGL policy like the one here. In keeping with the spirit of fortuity that is fundamental to insurance coverage, we hold that the CGL policy does not provide coverage to Custom for its alleged defective construction of and workmanship on the steel grain bin. Our holding is consistent with the majority of Ohio courts that have denied coverage for this type of claim. The majority view is that claims of defective construction or workmanship are not claims for "property damage" caused by an "occurrence" under a CGL policy.

In light of its holding on this issue, the Ohio Supreme Court did not need to reach the second certified question concerning the application of the Westfield policy’s contractual liability exclusion.

Florida Court Allows Extrinsic Facts for Determining Duty to Defend

In its recent decision in Composite Structures, Inc. v. Cont'l Ins. Co., 2012 U.S. Dist. LEXIS 147320 (M.D. Fla. Oct. 12, 2012), the United States District Court for the Middle District of Florida considered if and when an insurer can rely on facts extrinsic to a complaint for the purpose of determining a duty to defend.

The insured, Marlow Marine Sales was named as a defendant in an underlying suit brought by two individuals claiming bodily injuries as a result of exposure to carbon monoxide fumes while working aboard a yacht designed, manufactured and sold by Marlow.  Marlow subsequently tendered the matter to its general liability insurer, Continental.  One month after suit was filed, during which time Continental was still in the process of investigating Marlow’s right to coverage, plaintiffs in the underlying suit filed a memorandum of law specifying the time period during which they were exposed to the fumes.  Continental learned of this filing and relied on the information contained therein to deny coverage based on a pollution exclusion that only applied if the insured did not learn of the occurrence within seventy-two (72) hours of its commencement.   Continental relied on the information contained in the subsequently filed memorandum, which was not otherwise in the complaint, to conclude that this exception to the exclusion was inapplicable.

Marlow agreed that it did not learn of the occurrence within the seventy-two hour window.  It nevertheless contended that it was entitled to a defense since Continental only learned of the facts relevant to the coverage defense from a pleading filed subsequent to the complaint.  Marlow argued that Continental could not rely on such extrinsic facts in determining its defense obligation, but instead its duty to defend could only be determined by the complaint, which contained no facts one way or the other relevant to the application of the exception to the exclusion.  In light of this silence, Marlow contended that Continental was required to have provided a defense.

The court agreed that under Florida law, consideration of the duty to defend is typically restricted to the allegations in the complaint.  Citing to the Florida Supreme Court decision in Higgins v. State Farm Fire & Cas. Co., 894 So. 2d 5(Fla. 2004), however, the court acknowledged an exception to this rule where the insurer’s defense to coverage “is based on factual issues that would not normally be alleged in the underlying complaint.”  While the underlying suit against Marlow contained allegations relevant to the pollution exclusion, it did not contain allegations bearing on the issue of when Marlow became aware of the alleged occurrence.  The court nevertheless went on to consider whether these facts should have been asserted in the underlying suit.  The court answered this question in the negative, explaining that such facts were irrelevant in a products liability suit alleging causes of action for negligence and strict liability:

Neither cause of action requires a plaintiff to allege the specific date on which he informed the defendant of his injuries or the specific date on which the defendant informed its insurer. Indeed, before filing suit, an injured plaintiff is unlikely to be privy to information regarding the date on which a defendant informs its insurer of the incident. Those facts "would not normally be alleged in the underlying complaint," and therefore, the duty to defend can only be determined by examining outside evidence.

The court agreed that these facts extrinsic to the underlying complaint conclusively established that Marlow was not aware of the alleged occurrence within the seventy-two hour period necessary to trigger the policy’s exception to the pollution exclusion.   Thus, underlying the circumstances, the court held that “Continental was well within its rights to deny coverage.”

Pennsylvania Federal Court Addresses Reasonable Expectations Doctrine

In its recent decision in Austin James Associates, Inc. v. American International Specialty Lines Insurance Co., 2012 U.S. Dist. LEXIS 144449 (M.D. Penn. Oct. 5, 2012), the United States District Court for the Middle District of Pennsylvania had occasion to consider the application of the reasonable expectations doctrine to a commercial insured.

Austin James was insured under a remediation cost cap insurance policy issued by American International Specialty Lines Insurance Co (“AISLIC”).  Austin James paid its premium to AISLIC in February 2004 with the expectation that the policy would become effective on March 1, 2004 and would have a five (5) year duration.  For reasons not reflected in the opinion, AISLIC changed both the inception date and the policy period at the time of policy issuance.  Years later, when Austin James sought reimbursement for remediation costs under the policy, it first learned that the policy reflected an inception date of May 20, 2004 instead of March 1, 2004, and that the policy period was four years and four months instead of five years.  AISLIC denied Austin James’ demand for reimbursement under the policy on the basis that the policy had already expired.  Austin James subsequently brought a declaratory judgment action against AISLIC alleging breach of contract. 

AISLIC moved to dismiss Austin James’ suit on two grounds, the first being that Austin James’ suit was barred based on its own failure to have read the policy at the time it was issued.  AISLIC argued that under Pennsylvania law, a breach of contract claim cannot be sustained on a contention that a party to the contract did not read or understand the contract.  Austin James countered that based Pennsylvania’s “reasonable expectations” doctrine, applicable in the insurance context, it had no duty to have read the policy, and that its understanding of the policy period controlled.  The court agreed, explaining:

Under [the reasonable expectations] doctrine, an insurance policy exclusion will not apply where the insurer or agent has created in the insured a reasonable expectation of coverage.  Here, plaintiff prepaid for insurance for a particular policy period.  The defendant changed that period unilaterally.  Defendant provided a copy of the policy to plaintiff but did not provide separate notice of this change.  Therefore, plaintiff reasonably expected the policy to accurately reflect the agreed-upon starting date and term length. 

In reaching its conclusion, the court considered and rejected AISLIC’s argument that Pennsylvania’s “reasonable expectations” doctrine applies only in the context of individual policyholders, and not to commercial enterprises – an issue that remains unresolved under Pennsylvania law.  The court noted that in Reliance Ins. Co. v. Moessner, 121 F.3d 895 (3d Cir. 1997), the Third Circuit, applying Pennsylvania law predicted that the doctrine would apply even when the insured is a “sophisticated purchaser” of insurance, i.e., a large commercial enterprise.  AISLIC argued that in Madison Construction Co. v. Harleysville Mutual Ins., 735 A.2d 100 (Pa. 1999), Pennsylvania’s Supreme Court refused to extend the doctrine to commercial enterprises. Observing that the issue was not fully briefed in Madison Construction and that the Supreme Court’s consideration of the issue was limited to a brief mention in a footnote, the Middle District concluded that Madison Construction did not overrule Moessner, noting:

This footnote, which merely explains that the court declined to address an argument, is not the equivalent of the court holding that commercial entities are not protected by the reasonable expectations doctrine.

The Middle District further noted that the Third Circuit continued to apply the reasonable expectations doctrine to commercial insureds even after Madison Construction, as reflected in its decision in UPMC Health System v. Metropolitan Life Ins. Co., 391 F.3d 497 (3d Cir. 2004).   In light of the Third Circuit decisions, and the lack of any clear authority to the contrary from Pennsylvania’s Supreme Court, the Middle District of Pennsylvania rejected AISLIC’s argument that the reasonable expectations doctrine cannot apply to commercial entities. 

AISLIC argued as a secondary basis for dismissal that Austin James’ suit was barred by Pennsylvania’s four-year statute of limitation.  Specifically, AISLIC contended that the statute began running sometime in 2004 when the policy was issued.  The court rejected this, noting that on a breach of contract claim, the statute of limitations began running from the time of AISLIC’s denial of coverage in 2009, not in 2004 when the policy was issued.

Missouri Federal Court Affirms Denial of Coverage Based on Pollution Exclusion

In its recent decision in Doe Run Resources Corp. v. Lexington Ins. Co., 2012 U.S. Dist. LEXIS 140981 (E.D. Mo. Sept. 28, 2012), the United States District Court for the Eastern District of Missouri had occasion to consider whether the total pollution exclusion is ambiguous for failure to define the term “pollutants,” or for failure to include this term to include specific constituents.

The insured, Doe Run Resources Corporation, was named as a defendant in two lawsuits resulting from its mining, milling and smelting operations.  Specifically, both suits alleged bodily injuries resulting from Doe Run’s release of lead, cadmium and other toxic substances from chat and tailing piles located at two different facilities in Missouri.  Doe Run sought coverage for these suits from its general liability carrier, Lexington, which insured Doe Run under successive policies dating back to 1995.  Lexington denied coverage on the basis that the suits did not allege “bodily injury” or “property damage” arising out of an occurrence, as well as on the basis of the application of its policies’ pollution exclusion. 

For the policies issued from 1995 through 2003, the Lexington policies contained a pollution exclusion applicable to:

… bodily injury or property damage (including the loss of use thereof) caused by, contributed to or arising out of the actual or threatened discharge, dispersal, release, or escape of smoke, vapors, soot, fumes, acids, alklis, toxic chemicals, liquids or gases, waste materials or other irritants, pollutants or contaminants into or upon the land, the atmosphere or any course of body of water, whether above or below ground.

Notably, these policies did not define the term “pollutants.”  For the policies issued beginning in 2004, the pollution exclusion barred coverage for:

… "bodily injury" or "property damage" which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.

These policies define “pollutants” in relevant part as “any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

After concluding that Missouri law governed the Lexington policies, the court considered Doe Run’s arguments on summary judgment as to why the pollution exclusions were inapplicable.  Doe Run argued that the policies did not specifically exclude lead or other commercial products or commercial materials, and that the Lexington policies did not define “pollutants” to include lead and the other constituents at issue.

The court began its decision by noting that the language policies’ pollution exclusions were clear and unambiguous, even the pre-2004 exclusions that did not specifically define “pollutants.”  Relying on a standard dictionary definition, the court agreed that that the term “pollutants” is commonly understood as something that pollutes or contaminates the environment, especially with man-made waste.  Finding that the underlying suits alleged releases of pollutants from Doe Run’s facilities, thereby contaminating the environment, the court agreed that the suits “describe pollutants, as that term is used in its typical and ordinary sense.” 

Doe Run nevertheless argued that the decision in Hocker Oil Co. v. Barker-Phillips-Jackson, Inc., 997 S.W. 510 (Mo. Ct. App. 1999) required a different outcome.  Hocker involved the application of the pollution exclusion to an insured gas company’s accidental release of 2,000 gallons of gasoline into the ground.  The Missouri Court of Appeals held the exclusion was ambiguous as to whether gasoline was a “pollutant” for the purpose of a pollution exclusion, since in the eyes of that particular insured, gasoline was not a pollutant but instead the only product it sold.  The Doe Run court nevertheless found Hocker to be distinguishable since it involved “the onetime release of Hocker Oil’s finished product, gasoline, into the ground.”  By contrast, the underlying suits filed against Doe Run alleged negligent and careless releases of lead, cadmium and other toxic materials into the environment over a number of years.  The court found this to be a critical distinction:

That is, unlike Hocker's isolated accident, the [underlying lawsuits] allege the continual and systematic release of pollutants into the environment. Moreover, despite Doe Run's pleas to the contrary, the products involved here are not finished products. Even if some of these raw materials are marketable (as Doe Run claims), their continued release of these contaminants into the community constitutes pollution. In sum, "the Court believes that contamination caused by a gasoline leak resulting from a failed plug is quite different from contamination resulting from lead concentrate abandoned on a landowner's property."

The court also distinguished a Missouri trial court decision relying on Hocker in which Doe Run was a party.  That decision concluded that the pollution exclusion did not clearly apply to claims involving releases of lead, arsenic, cadmium or sulfur dioxide since the policies at issue (not issued by Lexington) did not define “pollutants” to include those materials.  The Eastern District of Missouri found the reasoning of the state trial court’s decision to be flawed, concluding that the mere fact that lead or other constituents were not included in the definitions of pollutants did not “undermine” the application of the exclusion or otherwise render its application ambiguous.

New Hampshire Supreme Court Overturns Rescission of Insurance Policy

In its recent decision in Great American Insurance Co. v. Christy, 2012 N.H. LEXIS 126 (N.H. Sept. 28, 2012), the Supreme Court of New Hampshire had occasion to consider whether an “innocent insured” provision in a legal malpractice policy precluded rescission of that policy, despite clear evidence that at least one insured failed to disclose information material to the risk in the policy application.

The insured law firm, Christy & Tessier, P.A., included attorneys Robert Christy and Thomas Tessier, partners for over forty-five years.  In 2001, Tessier was retained by a cousin to handle the probate administration of his aunt’s estate.  Over a five-year period, Tessier fabricated numerous documents as part of a scheme to misappropriate funds from the estate as well as from his cousin’s own personal bank accounts.  While there was no evidence that Christy was aware of these thefts, Christy did falsely notarize various documents Tessier, not knowing that these documents assisted Tessier in perpetuating his scheme.  In all, Tessier misappropriated over $1.5 million combined from his aunt’s estate and from his cousin’s personal accounts.  The scheme was discovered in 2006, and Tessier’s cousin asserted a claim against Tessier in October 2006.  In April 2007, Tessier entered into a settlement agreement with his cousin whereby he agreed to repay his debts pursuant to a payment plan.  In September 2007, however. Tessier advised that he would be unable to pay his debt.  It appears that Christy was unaware of the claim or of the settlement.

Christy & Tessier were insured under successive professional liability policies issued by Great American Insurance Company (“GAIC”) from 2001 to 2007.  The firm submitted an application for a renewal for the 2007-2008 policy period on May 22, 2007, which was subsequent to Christy’s settlement agreement.  Question 6(a) of the application asked:

After inquiry, is any lawyer aware of any claim, incident, act error or omission in the last year that could result in a professional liability claim against any attorney of the Firm or a predecessor Firm?

The application was completed and signed by Robert Christy, who answered “No” in response to this question. Notably, the application contained the following acknowledgment near the signature line:

The undersigned proprietor, partner, member, or officer, acting on behalf of the applicant, and all other proposed Insureds, hereby declares after diligent inquiry that the above statements are true and that no material facts have been suppressed or misstated.

Christy testified that he when completing the application, he asked Tessier whether he was aware of any information that should be disclosed, and Tessier told him there was none.  GAIC sought a rescission of the 07-08 policy when it subsequently learned of Tessier’s misappropriations and the settlement, as well as Christy’s improper notarizations.

Following a hearing, a trial court granted GAIC’s demand for rescission of the policy, concluding that the firm’s response to question 6(a) was false since Tessier knew of a claim against him as early as 2006.  The trial court concluded that Christy’s lack of knowledge was not a defense, explaining that:

[e]ven though Christy’s answer to the question and his subsequent declaration on the application were unwittingly false, the question on the application did not pertain solely to Christy’s knowledge but rather to the knowledge of ‘any lawyer’ at the law firm …  Accordingly, Tessier’s knowledge was imputed to Christy and the other insureds.

As such, and having concluded that the misstatements were material to GAIC’s decision to issue the policy, the trial court agreed that GAIC was entitled to a rescission of the policy.

On appeal, the Supreme Court of New Hampshire expressed its concern in imputing Tessier’s knowledge to Christy.  The court found support for its concern in the following “innocent insured” provision in the policy:

B.  Waiver of Exclusion (Innocent Insured) and Breach of Conditions: Whenever coverage under any provision of this policy would be excluded, suspended or lost

                                                *          *          *

2.   because of non-compliance with Section VII, Claims, subsection A, Notice of Claims relating to the giving of notice to the Company with respect to which any other Insured shall be in default solely because of the default or concealment of such default by one or more Insureds responsible for the loss or damage otherwise insured hereunder,

the Company agrees that such insurance as would otherwise be afforded under this policy shall apply with respect to each and every insured who did not personal participate in committing one or more of the acts, errors or omissions described in either such exclusion or such condition … .

While this provision, on its face, was limited to giving notice of claims to GAIC, and served to protect one insured in the situation where another insured conceals information, the court observed a broader principle in the policy to protect innocent insureds.  The court believed Christy was precisely such an innocent insured when completing the policy application as Tessier withheld information that should have been disclosed.

GAIC pointed out that the application inquired whether any prospective insured was aware of facts that that could give rise to a claim, not just whether Christy was aware of such facts.  GAIC further argued that the innocent insureds language in the policy did not apply to the policy application.  The court did not agree, explaining:

It is not clear, however, that the policy provision excluding imputed knowledge to innocent insureds does not apply to giving notice on the Shortform Application.  Thus, in the absence of language specifically imputing knowledge to innocent insureds of false statements made on the Shortform Application, the contract read as a whole is ambiguous.

In light of this ambiguity, the New Hampshire Supreme Court concluded that the lower court erred as a matter of law on the issue of rescission.  The matter was, however, remanded for further findings on whether application of any other coverage defenses operated to preclude coverage.

Ninth Circuit Holds No Duty to Defend Anxiety Claim

In its recent decision in Conley v. First Nat'l Ins. Co. of America, 2012 U.S. App. LEXIS 20281 (9^th Cir. Sept. 27, 2012), the United States Court of Appeals for the Ninth Circuit had occasion to consider whether under Montana law, a lawsuit alleging “anxiety” qualified as “bodily injury” for the purpose of triggering a duty to defend under a general liability policy.

The underlying matter giving rise to plaintiffs’ claim involved accounting and tax services provided by Silvertip Accounting, which was insured under a primary general liability policy issued by First National Insurance Company of America.  Plaintiffs, Dale and Karen Conley, alleged that as a result of bad advice from Silvertip, they suffered severe tax penalties and disruption of their gifting and estate plan.  The Conleys filed suit against Silvertip in Montana state court, alleging breach of fiduciary duty, fraud, negligence, false advertising and deceptive trade practices. First National denied coverage to Silvertip on the grounds that the Conleys’ lawsuit did not allege an “occurrence” or “bodily injury.” The Conleys subsequently entered into a consent judgment with Silvertip in the amount of $3.6 million as well as an assignment of rights under the First National policy.  The Conleys later filed a declaratory judgment against First National in Montana federal court.

In a June 2011 decision, the United States District Court for the District of Montana, on competing motions for summary judgment, held that the underlying suit did, in fact, allege an “occurrence.”  It further held, however, that the complaint filed by the Conleys in their state court action against Silvertip did not allege any specific physical injuries qualifying as “bodily injury,” but instead merely alleged anxiety resulting from their financial loss.  The Conleys nevertheless relied to a letter their attorney had written to First National immediately after First National denied coverage to Silvertip, which stated that the Conleys’ financial loss had “taken a serious toll on their health” and that their financial loss also had an “emotional cost.”   The lower court acknowledged that under Montana law, facts extrinsic to a complaint can give rise to a coverage obligation.   Notwithstanding, the court concluded that the Conleys’ letter failed to “make even a generalized reference to physical injury” that could be considered “bodily injury.”  Further, the court concluded that:

An injury to a person’s “health” can take many forms, and will not necessarily include physical harm.  It is not the Defendants’ responsibility to affirmatively disprove a bodily injury where none has been alleged.  An insurer is not required to seek out information that could give rise to a duty to defend.

On appeal, the Ninth Circuit began its decision by observing that in Allstate Ins. Co. v. Wagner-Ellsworth, 188 P.3d 1042 (Mont. 2008), Montana’s Supreme Court articulated the rule that for the purpose of a general liability policy, “bodily injury” includes “mental or psychological injury that is accompanied by physical manifestations.”  This necessarily includes “conditions that are susceptible to medical diagnosis and treatment in a manner which distinguishes them from mental injuries.”  In other words, under Montana law, mental injuries unaccompanied by a physical manifestation do not constitute “bodily injury.”

The Conleys argued that for the purpose of a duty to defend, anxiety, unlike a claim of emotional distress or mental anguish, is typically understood to include physical manifestations.  The Conleys further argued that their letter to the insurers explicitly stated that their “dread of tax liability” had taken a serious toll on their health.  Notwithstanding, the Ninth Circuit held that this allegation, in and of itself, did not trigger a defense obligation:

Even if anxiety "typically includes such things as headaches, sleeplessness, muscle tension, [and] nausea," an insurer need not assume physical manifestations rising to the level of "bodily injury" whenever "anxiety" is alleged.

Rather, continued the court, there must be an actual allegation of a physical manifestation supported by “sufficient documented evidence” for coverage to be triggered.  In this regard, the Ninth Circuit agreed with the lower court that the Conleys’ letter to First National failed to make even a generalized reference to physical injury that could constitute “bodily injury.”

The Ninth Circuit also rejected the Conleys’ argument that their pre-suit letter at the very least triggered a duty for First National to investigate whether the Conleys had actually suffered “bodily injury.”  In addition to agreeing with the lower courts statement of Montana law that insurers do not have an affirmative obligation to disprove bodily injury where none has been alleged, the court concluded that First National did, in fact, sufficiently investigate by reviewing the complaint and accompanying materials and by requesting additional information pertinent to its investigation.   

Ninth Circuit Affirms Rescission of Professional Liability Policy

In its recent decision in Tudor Ins. Co. v. Hellickson Real Estate, 2012 U.S. App. LEXIS 19904 (9^th Cir. Sept. 21, 2012), the United States Court of Appeals for the Ninth Circuit, applying Washington law, examined whether an insurer was entitled to rescission of a professional liability policy based on the insured’s failure to have disclosed several pending administrative complaints in the policy application.

Tudor Insurance Company successfully obtained summary judgment on its claim for rescission of a professional liability policy it had issued to Hellickson Real Estate.  Tudor demonstrated that at the time the policy was issued, Hellickson had been notified by state authorities of at least ten complaints filed against it with the Washington Department of Licensing.  Hellickson, however, failed to disclose these complaints in its application. Tudor learned of these misrepresentations when during the policy period, Hellickson sought coverage for a disciplinary proceeding brought by the Department of Licensing.  After learning of these prior complaints, Tudor advised that it was rescinding the policy and it also advised that it would not be providing Hellickson with a defense in connection with the disciplinary proceeding. 

On appeal, the Ninth Circuit began its decision by observing that under Washington law, an insured is presumed to have intended to have deceive the insurance company if it knowingly makes a false statement.  See, Ki Sin Kim v. Allstate Ins. Co., 153 Wn. App. 339, 223 P.3d 1180 (Wash. Ct. App. 2009).  It is the insured’s burden to prove it had no intention to deceive.  The court agreed that all elements necessary for rescission were present.  First, it concluded that Hellickson had knowingly misrepresented the existence of the pending administrative complaints.  In this regard, the court held that the insured’s “professed misinterpretation” of the application, in and of itself, was insufficient to raise a question of fact as to whether its false statement was made knowingly, particularly since the application language was clear and unambiguous.  The court also agreed that that the insured failed to rebut the presumption of its intention to deceive Tudor, since it failed to present “more than a scintilla of evidence” regarding its intention.  Finally, the court agreed that Hellickson’s misrepresentations were material in nature and that Hellickson.  At most, explained the court, Hellickson raised an argument that there was no misrepresentation.  The court readily dismissed this argument, noting:

… the Hellicksons revealed nothing to Tudor about the existence of the DOL investigations, but instead disclosed only a listing agency fine that they averred had been "handled through appeal" and "reduced or dropped" with "no claims made." As the district court discerned, Tudor's failure to investigate that incident does not create a factual question about whether numerous and ongoing disciplinary investigations by the state licensing authority prompted by a slew of complaints against the Hellicksons for misrepresentation, negligence, incompetence, and malpractice were material to Tudor's risk.

Hellickson argued in the alternative that even if Tudor was otherwise entitled to rescind the policies, it was estopped from doing so as a result of having wrongfully denied coverage for the Department of Licensing proceeding. Specifically, Hellickson claimed that under Washington law, if an insurer wrongfully denies coverage, then it is estopped from relying on coverage defenses, which necessarily includes the right to rescind a policy.  The court disagreed with this assessment of the law, explaining:

This argument is untethered from Washington state case law, which establishes only that an insurer who refuses to defend a policyholder in bad faith may be estopped from disputing the scope of coverage provided by a valid contract. See Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 229 P.3d 693, 696 (Wash. 2010). The Washington courts have never held that such an insurer may be estopped from disputing the very legitimacy of the contract. To the contrary, the courts have consistently ruled that policyholders who render their contracts void by their own fraud may not pursue claims of bad faith against the insurer. See Ki Sin Kim, 223 P.3d at 1189 (citing, inter alia, Mutual of Enumclaw Ins. Co. v. Cox, 110 Wn.2d 643, 757 P.2d 499, 504 (Wash. 1988)).