Granite State Ins. Co. v. Integrity Structures, LLC, No. C14-5085BHS, 2015 WL 136006 (W.D. Wash. Jan. 9, 2015).

The U.S. District Court for the Western District of Washington held that an insurer did not act in bad faith where the insured assigned its rights against the insurer to the underlying plaintiff before it provided notice to the insurer, and then provided minimal information in response to the insurer’s requests for nearly a year. 

In 2006, Integrity Structures, LLC (“Integrity”) contracted with a developer to serve as general contractor for the construction of a 30-unit condominium project in Westport, Washington.  When construction deficiencies with the condos emerged, the condominium homeowners’ association (the “Association”) sued the developer and Integrity in Washington state court.  Integrity had several insurance policies covering the relevant period.  One of  Integrity’s insurers, Gemini Insurance Company (“Gemini”), appointed defense counsel.

In September 2012, Integrity entered into a contingent settlement with the Association. Among other things, the agreement called for Integrity to tender its defense to its three remaining primary general liability insurers, including Granite State Insurance Company (“Granite State”).  If neither Granite State nor Integrity’s other two insurers (other than Gemini) agreed to defend Integrity within 60 days of the tender, Integrity agreed to consent to judgment in favor of the Association for $4.1 million and assign all claims it had against the insurers (other than Gemini) to the Association.  In turn, the Association agreed not to execute on the consent judgment.

Granite State received Integrity’s tender requesting a defense on November 29, 2012.  The tender included the most recent version of the Association’s complaint but not the contingent settlement agreement.  On December 7, 2012, Granite State wrote to Integrity’s lawyer and requested several categories of information in order to evaluate the coverage claim. The lawyer for Integrity referred Granite State to counsel for the Association. Between late December 2012 and November 2013, Granite State repeatedly sought information from Integrity and the Association but received no substantive response. 

On September 30, 2013, a stipulated consent judgment for $4.1 million was entered against Integrity in the state court action.  Two months later, on November 20, 2013, Integrity finally disclosed to Granite State the contingent settlement agreement and the consent judgment.

In January 2014, Granite State filed suit against Integrity in the U.S. District Court for the Western District of Washington, seeking a declaratory judgment that it had no duty to defend Integrity or provide coverage for the $4.1 million consent judgment.  Integrity filed counterclaims for breach of contract and bad faith, as did the Association when it intervened in the case in June 2014.  The parties filed cross-motions for summary judgment.

The court ruled that although Granite State did have a duty to defend Integrity, because the allegations in the state court lawsuit were “conceivably” covered by the policy, Integrity and the Association had failed to make out a bad faith claim.  The court stated that an insurer acts in bad faith if its breach of the duty to defend “was unreasonable, frivolous, or unfounded.”  Further, a Washington statute provides that an insurer must complete its investigation within 30 days if doing so is reasonably possible, and violation of that statute would also signal bad faith.  While Granite State’s investigation took far longer, the court noted that Granite State’s prompt and repeated attempts to gather information from its insured were met with “virtual silence.”  Thus, Granite State did not act in bad faith.

Further, the court held that Integrity and the Association had violated their duties of notice and cooperation under the Granite State policy by failing to provide Granite State with notice of the state court lawsuit for 15 months and keeping silent about their settlement until even more time had passed.  Stating that Granite State may in the future be able to show that it had been prejudiced by Integrity’s lack of cooperation (and more than likely collusion), the court denied Granite State’s motion for a declaration that Integrity had forfeited its coverage, but did so without prejudice, noting that fact issues remained as to whether Granite State had been “actually and substantially prejudiced.”