Sharply-Divided Washington Supreme Court Holds That Sureties, Like Insurers, Must Pay Attorney Fees to Prevailing Parties When They Wrongfully Deny Coverage

by Pepper Hamilton LLP
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King Cnty. v. Vinci Constr. Grands Projets/Parsons RCI/ Frontier-Kemper, JV, No. 92744-8, 2017 Wash. LEXIS 743 (July 6, 2017).

King County contracted with three construction firms (collectively, “VPFK”) to construct a tunnel.  The contract required substantial completion by November 14, 2010 (the “contract time”).  It also required VPFK to secure a performance bond from five surety companies, under which the sureties were to remedy any default in VPFK’s performance.

VPFK experienced difficulties with its tunnel-boring equipment and was unable to dig nearly as fast as estimated.  When it became clear that VPFK would not achieve substantial completion by the contract time, King County declared VPFK in default.  The sureties refused King County’s request for a cure, arguing that because the contract time had not passed, no default had yet occurred.

King County filed a breach of contract action against VPFK and the sureties, who denied coverage and adopted all of VPFK’s defenses.  A jury found in favor of King County and awarded nearly $130 million in damages.

The trial court awarded King County its attorney fees based on the rule the Washington Supreme Court announced in Olympic Steamship Co. v. Centennial Insurance Co., a case involving liability insurance, not surety bonds, that a “prevailing party” – defined as the party who wins a lawsuit when that lawsuit is forced by an insurer’s refusal to defend or pay a claim – is entitled to attorney fees.  The Court of Appeals affirmed the award.

The Washington Supreme Court also affirmed in a sharply-divided decision.  The majority held that the Olympic Steamship rule applied equally to suretyships and performance bonds based on its prior plurality decision in Colorado Structures, Inc. v. Insurance Co. of the West.

The majority also held that the legislature’s subsequent enactment of a statutory attorney fees remedy applicable to public works contracts did not supersede Olympic Steamship.  Nothing in the statute or its legislative history evinced an intent to exclude all other means of recovering attorney fees.

The majority stated that the statute’s provisions, which permitted a “prevailing party” – defined as a party whose recovery equaled or exceeded its settlement offer – to recover attorney fees, were not inconsistent with an Olympic Steamship award.  The majority drew a distinction between “coverage” disputes and “claims” disputes.  Where an Olympic Steamship award penalized a surety who denied coverage, a statutory award penalized a party who rejected a reasonable offer to settle a claim.  The majority found that while a single case might entail both disputes, the attorney fees award could be apportioned between the two.  Ironically, however, it found that such apportionment was impossible in the case before it, given that the sureties had adopted VFPK’s defenses.

The dissenters filed two separate opinions.  The first dissenting opinion asserted that Colorado Structures was not a precedential opinion, that there was no precedent holding that Olympic Steamship fees extend to performance bond cases, and that no such extension should be granted because surety bonds are fundamentally different from casualty insurance policies.

The second dissenting opinion asserted that the Olympic Steamship award was in direct conflict with the attorney fee statute.  The dissent explained that Olympic Steamship and the statute defined “prevailing party” in fundamentally different ways.  Because the statute prohibited parties from contracting around its requirements, both definitions could not be in force simultaneously.  To adopt the majority’s conclusion to the contrary would lead to absurd results, as under its approach, both parties could be “prevailing parties.”  While the dissent acknowledged that a court could potentially apportion fees in such a situation, the statute had no language contemplating such a split.  Since the statute and Olympic Steamship both governed attorney fees and were in conflict, the dissent concluded that the more specific statute should prevail over the more general common law.

The dissent also characterized the majority’s distinction between coverage disputes and claim disputes as “abstract” in that it ignored that a coverage dispute could be a necessary precursor to an action for damages.  It was unclear to the dissent “why combining a coverage question with a claim for damages results in the entire claim being treated as a coverage question.”  The dissent asserted that doing so would allow parties to strategically raise a coverage question to avoid the application of the statutory requirement of a settlement offer, which would frustrate the legislative intent because the statute was enacted to promote settlements.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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