On August 11, 2022, the Washington State Supreme Court, answering a certified question from the U.S. District Court for the Western District of Washington, held that a contractor’s commercial general liability insurance policy that requires a loss to occur and be reported within the same policy year, and provides no prospective or retroactive coverage, violates Washington’s public policy and renders the “occurrence” or “claims-made and reported” provisions unenforceable.1
Cox Construction was the general contractor of a project to remodel a motel in Long Beach, Washington. Cox hired Baker and Son Construction, Inc. as a subcontractor on the project. 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, in the head. Mr. Cox died in his sleep that night.
Preferred Contractors Insurance Company (PCIC) had issued two consecutive commercial general liability policies to Baker, from January 5, 2019, to January 5, 2020, and again from January 5, 2020, to January 5, 2021. The policies’ insuring agreements were a hybrid occurrence and claims-made and reported. They stated that both the occurrence and the bodily injury needed to first occur during the policy period in order to be covered. The policies also each contained a “claims made and reported limitation” endorsement that limited coverage to claims first made against the insured and reported to PCIC, in writing, during the policy period or extended reporting period. The endorsements provided there was no continuous coverage between policies that were renewed, limiting each policy period to one year.
On September 23, 2020, Mr. Cox’s widow notified Baker that she was pursuing a wrongful death claim against it. Baker then notified PCIC of the claim on September 25, 2020. Though PCIC agreed to defend Baker, subject to a reservation of rights, PCIC denied coverage on October 14, 2022. In so doing, PCIC took the position that 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 bodily injury, the occurrence, the claims made and the claims reported dates did not all occur in a single policy period. In other words, the 2019 policy did not afford coverage because the claim was not first made and reported within the policy period, and the 2020 policy did not provide coverage because the “occurrence” and bodily injury giving rise to the claim happened before inception of the policy.
In the subsequent declaratory judgment action, PCIC sought a declaration that it owed no duty to defend or indemnify Baker. The U.S.D.C. for the Western District of Washington certified the following question to the Washington State Supreme Court:
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?
The Supreme Court noted that commonly claims-made and reported policies either set a retroactive date for before the policy period, or as the first day of the policy period, and retain that retroactive date across policy renewals in order to prevent gaps in coverage. The court differentiated this practice from “nonretroactive claims made policies,” like the PCIC policies, which reset the retroactive date to the start of each new policy period. In a nonretroactive claims made policy, no policy renewal ever responds to conduct that occurred before its policy period.
Although the court expressed that insurance policies are private contracts and, in Washington, parties are ordinarily free to exercise their freedom of contract to limit the liability covered in the policy, the Supreme Court of Washington will refuse to enforce an insurance provision if it is contrary to public policy. Relying on Washington statutes requiring contractors to have sufficient insurance coverage, the court concluded that the Washington legislature had created a public policy of ensuring that contractors are financially responsible for injuries caused to members of the public by their negligence.
The 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.” 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.”
Taking into consideration the freedom to contract, the court concluded that 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 the obligation, the court will not enforce insurance provisions that render coverage “so narrow it is illusory” and would cause contractors to default on their statutorily mandated financial responsibility. The court therefore held that because the policies failed to provide prospective or retroactive coverage, and created limited one-year windows for claims to occur and be both made and reported to qualify for coverage, the policies were against public policy and the nonretroactive claims made policy, as issued to contractors, is unenforceable. The court consequently answered the certified question in the affirmative.
While Preferred Contractors addressed a very specific type of insurance policy in which the policyholder would not be entitled to coverage for an otherwise covered claim due to the claimant’s timing alone and no fault of their own, insurers should carefully consider whether policies issued to contractors and other businesses governed by a financial responsibility law are sufficiently broad. Where Washington state has established a public policy holding the policyholder financially responsible to members of the public injured by the policyholder’s negligence, Washington courts may be more likely to construe policies in favor of coverage.
