Opinion
No. 59924-1-I.
August 25, 2008.
Appeal from a judgment of the Superior Court for King County, No. 05-2-25184-1, Andrea A. Darvas, J., entered April 20, 2007.
Affirmed by unpublished opinion per Becker, J., concurred in by Grosse and Ellington, JJ.
Royal Insurance Company incurred expense in settling a bad faith lawsuit brought by directors and officers to whom Royal had denied coverage under a claims-made policy. Royal seeks indemnification from Brady Company, the broker for the insureds, arguing that it was Brady who caused the gap in coverage by failing to forward timely notice of the claim to Royal, and who then wrongfully caused Royal to become embroiled in the bad faith litigation by blaming Royal for its own error. We conclude that Brady was Royal's agent, and therefore when Brady received notice of the claim it was also notice to Royal. Accordingly, we conclude that Brady was not the proximate cause of the expenditures made by Royal. The trial court properly dismissed Royal's claim for indemnity on summary judgment.
Royal offered insurance policies to corporate directors and officers. Royal began issuing D O (directors and officers) policies to Alaska native corporation Klukwan, Inc. in June, 2000. The policies were claims-made insurance policies, covering claims asserted during the policy period. Royal issued the D O policy at issue in this litigation on June 14, 2002.
In the fall of 2002, Klukwan sent a brokers' letter of authorization to Royal. The letter explained that Klukwan was appointing Brady Company as Klukwan's exclusive insurance agent/broker. Joe Smith, Royal's underwriter for the Klukwan account, sent Brady a letter dated December 23, 2002 acknowledging Brady's appointment as the broker of record on Klukwan's policy with Royal.
Clerk's Papers at 330.
Clerk's Papers at 331.
Around that same time, Royal decided to stop underwriting professional and financial risks policies. Royal sold the renewal rights to its D O policies to St. Paul Mercury Insurance Company. This agreement meant that St. Paul would serve as a third-party administrator for claims submitted under expiring Royal policies, such as the Klukwan policy. All underwriters and other staff members formerly involved in handling claims for Royal on its D O policies, including Joe Smith, became employees of St. Paul. Smith continued as the underwriter for the Klukwan account. In March 2003, St. Paul informed the brokers and agents of Royal's D O policies, including Brady, that St. Paul would be administering the claim run-off business for Royal's D O policies.
In May 2003, Brady informed Klukwan that it was time to renew the policy, this time with St. Paul instead of Royal. St. Paul eventually provided renewed coverage.
On June 1, 2003, Brady and Royal entered into an agency agreement establishing that Brady was Royal's agent with the obligation to immediately notify Royal of claims under policies written pursuant to the agreement.
Clerk's Papers at 893-985.
Brady received a letter giving notice of a possible claim against Klukwan on June 9, 2003. The letter was from attorney Jan Sokol on behalf of Travelers Casualty Surety Company of America. Travelers provides surety bonds for construction contractors. In Sokol's letter, Travelers alleged that certain directors and officers of an Alaskan construction company owned by Klukwan had provided incorrect financial information when applying for the Travelers' surety bonds.
The policy period for the Royal claims-made policy terminated on June 14, 2003. The policy required the insureds, as a condition precedent to their rights under the policy, to give Royal written notice of any claim no more than 60 days following the termination of the policy, addressed to Royal at its office in Charlotte, North Carolina.
On June 12, 2003, Brandon Allen, the Brady representative responsible for the Klukwan account, sent Smith an email about the Sokol letter and faxed him a copy of it. Smith at this time was working for St. Paul pursuant to the agreement whereby St. Paul was handling the claim run-off business for Royal's D O policies. Allen did not send notice of the claim to Royal in North Carolina, and neither did Smith.
Allen sent Smith a follow up message about the Travelers' claim on October 20, 2003:
Just got a call from Klukwan CEO that Travelers is asking for some records relative to the auditing work done by their CPA firm . . . I'm guessing that Travelers will go after the CPA alleging negligence. CPA might respond that Klukwan did not disclose, etc. etc. Do you have a current claims status report you could send me?
Clerk's Papers at 332.
In response to Allen's message, Smith told Allen to contact Royal underwriter Natalie Avena.
On November 7, 2003, a representative from Brady forwarded the Sokol letter to Avena in connection with "the directors and officers liability claim against Klukwan, Inc." Avena responded that she was unable to accept notice of the claim but said she would forward the information on to Royal's claims department. Several days later, a St. Paul attorney (writing on behalf of Royal) sent Klukwan and Brady a letter acknowledging receipt of the Travelers' claim information. The letter explained that St. Paul would be handling the claim on Royal's behalf and asked that all future correspondence be directed to St. Paul attorney Denise Rasmussen.
Clerk's Papers at 612.
Clerk's Papers at 323.
On December 9, 2003, Brady's representative Brandon Allen sent Travelers an email informing them that their claim letter was forwarded to Royal in June, when Brady received it.
Clerk's Papers at 616.
In August 2004, Travelers filed a complaint against the Klukwan officers and directors based on the allegations set forth in the Sokol letter. Travelers claimed over $8 million in damages. St. Paul attorney Rasmussen testified that she received a copy of the complaint from Brady two weeks after it was filed.
Clerk's Papers at 227.
In September 2004, Rasmussen sent Klukwan and Brady a letter formally denying coverage for the Travelers' claim. Although Rasmussen was employed by St. Paul, she sent the letter on behalf of Royal. Rasmussen stated that the Sokol letter was not notice of a potential claim because it did not contain a monetary demand. Further, she stated, even if it was a claim, Royal did not receive timely notice of the Sokol letter during the policy period. The 60-day grace period for reporting a claim terminated on August 13, 2003. Rasmussen took the position that the first notice Royal received of the matter was when the Sokol letter was forwarded to Natalie Avena on November 7, 2003.
Clerk's Papers at 325-29.
Avena had already informally communicated to Klukwan and Brady the decision to deny coverage. Allen sent an email to the attorney for the Klukwan insureds accusing Royal of bad faith for its decision to deny coverage:
Thanks for sending over a copy of the complaint. As you are most likely aware, Royal has denied the claim. . . . This is an unwise action on their part, clearly a bad faith response to a valid claim under the policy.
Clerk's Papers at 696.
In September 2004, the officers and directors tendered defense of the Travelers' lawsuit to Marsh McLennan, Inc., Brady's successor. Marsh refused the tender. The letter refusing the tender said, "While Royal may have denied this claim, it is my understanding that it received timely notice and that its denial on those grounds is unwarranted."
Clerk's Papers at 774.
Clerk's Papers at 777.
In March 2005, the Klukwan insureds filed a complaint against Royal, St. Paul, Brady, and Marsh. They sought a declaration that Travelers' claims were covered under Klukwan's D O policy with Royal and a declaration that the Sokol letter was a "claim." They alleged that Brady was Royal's appointed agent and that accordingly, Brady's receipt of notice of the claim in June 2003 was imputed to Royal. Alternatively, if Royal was justified in denying coverage based on Brady's failure to timely notify Royal of the claim, then their damages had been caused by Brady's negligence as their broker.
Clerk's Papers at 779-791.
The Klukwan insureds moved for summary judgment in August 2005. They argued that Royal received timely notice of the claim through its agents Brady and St. Paul. Notice to Brady was sufficient, according to the officers and directors, because the agency agreement between Brady and Royal obligated Brady to forward notice of claims to Royal.
Clerk's Papers at 861.
Royal responded that Brady and St. Paul were not authorized to act as agents for Royal with respect to notice. The agency agreement between Brady and Royal authorized Brady to provide services as an agent on all policies Brady had "placed" with Royal:
Clerk's Papers at 27 (Royal's response to Officers and Directors' motion for summary judgment).
2. AGENT'S AUTHORITY
. . . .
Agent is authorized by the Company to:
. . . .
D. Provide all usual and customary services of an insurance agent on all Policies placed by Agent with Company.
. . . .
3. AGENT'S DUTIES AND RESPONSIBILITIES
Agent shall be obligated to:
. . . .
D. Immediately notify Company of all claims, suits or losses under Policies written pursuant to this Agreement and to cooperate in the Company's investigation, adjustment, settlement and payment of claims.
Clerk's Papers at 893-94.
Royal's former D O underwriter, Joseph Racioppi, declared that the language of the policy meant that Brady was not authorized to accept notice on behalf of Royal for the claim of the Klukwan insureds because Klukwan's previous broker, not Brady, had placed the Klukwan policy. Royal argued that the agency agreement expressly limited Brady's authority. As to the argument that Brady had broad agency under the authorization to provide "all usual and customary services of an insurance agent", Royal relied on Racciopi's declaration that such language applied only to the agent who had originally placed the policy with Royal.
In September 2005, while the motion for summary judgment was pending, four of the officers and directors settled with Travelers by stipulating to a consent judgment for $4 million, with Travelers agreeing not to execute the judgment against them in exchange for their assignment to Travelers of the pending bad faith lawsuit against the insurers and brokers.
Clerk's Papers at 390, et seq. Travelers eventually dismissed its claims against another Klukwan officer.
Judge Jim Rogers conducted a hearing on the motion for summary judgment by the Klukwan insureds in January 2006. One month later, Judge Rogers denied the motion. He ruled, and this ruling is no longer in dispute, that the Sokol letter to Brady was a "claim." However, he also ruled that a genuine issue of material fact remained as to whether Brady and St. Paul were agents of Royal such that the timely notice to them was also notice to Royal.
Clerk's Papers at 690-94.
On September 25, 2006, Royal filed a cross-claim against Brady seeking contractual and equitable indemnity. This is the claim that gives rise to this appeal.
In October 2006, Royal settled the underlying bad faith claim of the Klukwan insureds for $500,000. The only claim left to be resolved was Royal's cross-claim against Brady. In early November 2006, Brady deposed Racioppi. Racioppi was Royal's CR 30(b)(6) witness on the agency agreement between Royal and Brady. Contrary to his earlier declaration, Racioppi conceded that Brady's status as an agent for Royal was not affected by the fact that the Klukwan policy had been originally placed with Royal by a different broker. He agreed that although the "technical" writing of the agreement might literally read otherwise, in practice an agent such as Brady started operating under the agency agreement as soon as it had named the producer on the account. Thus, once Brady's appointment as Royal's agent became effective on December 26, 2002, all the provisions of the agreement applied to Brady as if it had been the placing broker, and Brady was to provide all the usual and customary services for that account including notifying Royal of claims.
Clerk's Papers at 154-57.
Brady filed a motion to dismiss Royal's cross-claims for contractual and equitable indemnity in March 2007. Judge Andrea Darvas granted Brady's motion and dismissed Royal's cross-claim. Royal appeals.
The standard of review of an order of summary judgment is de novo, and the appellate court performs the same inquiry as the trial court. Summary judgment is appropriate only if the pleadings, affidavits, depositions, and admissions on file demonstrate the absence of any genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. Genie Industries, Inc. v. Market Transport, Ltd., 138 Wn. App. 694, 700, 158 P.3d 1217 (2007).
PROXIMATE CAUSE
Royal's cross-claim alleges that Brady is liable to Royal for the payments Royal made to settle the claims of the Klukwan insureds, as well as fees and costs Royal incurred in defending against those claims. Brady responds that it did not proximately cause Royal to incur any of these expenditures and therefore is not liable to Royal for indemnity. Proximate cause consists of two elements: cause in fact and legal causation.Versuslaw, Inc. v. Stoel Rives, LLP, 127 Wn. App. 309, 328, 111 P.3d 866 (2005). Cause in fact refers to the "but for" consequences of an act, that is, the immediate connection between an act and an injury. The "but for" test requires a party to establish that the act or omission complained of probably caused the subsequent injury. Legal causation rests on considerations of policy determining how far a party's responsibility should extend. It involves the question of whether liability should attach as a matter of law, even if the proof establishes cause in fact. Proximate cause may be determined as a matter of law only when reasonable minds could reach but one conclusion. Versuslaw, Inc., 127 Wn. App. at 328.
Royal's theory is that but for Brady's delay in forwarding the Sokol letter to Royal, Royal would have never become a defendant in the bad faith lawsuit by the Klukwan insureds. Brady received Sokol's letter about the Travelers claim in June, 2003, right at the end of the one-year term of the Royal policy. Brady notified Smith, but at this point Smith was working for St. Paul, not for Royal. Royal took the position that it did not receive notice of the claim until Brady forwarded the Sokol letter to Royal employee Natalie Avena on November 7, 2003. Even allowing for the two-month grace period, this was too late for the Klukwan insureds to receive coverage under the Royal policy. According to Royal's theory, Royal was entitled to deny coverage. If so, then any loss of coverage by the Klukwan insureds was attributable to Brady, who should have notified Royal directly no later than August 13, 2003. Royal alleges that the only reason the Klukwan insureds dragged Royal into the bad faith litigation was because Brandon Allen, the broker handling the case on behalf of Brady, inaccurately informed them that Royal had acted in bad faith by denying the coverage claim.
Royal's theory is premised on the assertion that it was entitled to deny coverage to the Klukwan insureds because it did not receive timely notice of the claim against them. This premise is faulty. We conclude that Brady was Royal's agent by virtue of the agency agreement of June 1, 2003. Brady received timely notice of the Travelers claim in June 2003. Because Brady was Royal's agent, the timely notice was imputed to Royal, and Royal was obligated to cover the claim.
The agency agreement between Royal and Brady states that the agent (Brady) is obligated to immediately notify the Company (Royal) of all claims. It does not specify an address where that notice must be given and it does not specify that notice must be given prior to the expiration of a policy. But even if Brady had a duty to promptly forward the notice to Royal's claims office in North Carolina as opposed to the St. Paul employees who were handling claims locally on behalf of Royal, Royal has not shown that it was prejudiced by any delay. It is conceded that the delay did not impede Royal's investigation.
Clerk's Papers at 252.
Royal simply assumes, based on Judge Rogers' ruling, that there are issues of fact about whether notice to Brady was notice to Royal. But we are not bound by that ruling; and even more to the point, Judge Rogers made his ruling on a different record that did not include Racioppi's deposition. Questioned in his deposition about the applicability of the agency agreement between Royal and Brady, Racciopi changed his position and admitted that under the agreement, Brady was acting as Royal's agent for all purposes set forth in the agreement. He disavowed the declaration he filed in the case that was before Judge Rogers as being a literal reading of the agreement but not a correct interpretation of the scope of authority of an appointed agent.
Racioppi's discussion in his deposition, which Royal's briefing ignores, coincides with what we take to be the general rule about the authority of a broker who is an insurer's appointed agent to accept notice of a claim on behalf of an insured.See, e.g., Putney School Inc. v. Schaaf, 157 Vt. 396, 599 A.2d 322, 326 ("It should be apparent to reasonable insurers that doing business through a 'middleman' with whom the insured communicates and to whom premiums are paid, creates the distinct impression that notice to the 'middleman' is all that is required.") A principal is bound by a notification directed towards an agent who has, or appears to have, authority in connection with it, either to receive it, to take action upon it, or to inform the principal or some other agent who has duties in regard to it. Goodman v. Boeing Co., 75 Wn. App. 60, 85, 877 P.2d 703 (1994). We are left with the conclusion that Brady was Royal's agent for all practical purposes. Royal was bound by the timely notice Brady received.
There is no evidence establishing that Brady's failure to give immediate notice to Royal increased Royal's obligation to provide coverage to the officers and directors over that which would have been owed if Brady had given immediate notice. An agent has nothing for which to accept responsibility or any reason to indemnify the insurance carrier if the agent's failure to forward information was not the proximate cause of any damage to the carrier. See Fletcher v. West American Insurance Co., 59 Wn. App. 553, 799 P.2d 740 (1990).
Royal argues that Brady made false statements and accusations that caused the officers and directors to sue Royal for bad faith. Reasonable minds, however, could reach but one conclusion — it was not Brady's encouragement that caused the insureds to sue Royal for bad faith. The officers and directors sued Royal for bad faith because Royal denied coverage on the basis that it had not received timely notice of a claim, when in fact it did receive timely notice through Brady.
Royal contends the proximate cause rule of Fletcher should not be applied to a case involving an agent's "deliberately false statements" to "shift blame." According to Royal, there is no proximate cause requirement when an insurer seeks indemnity because of an agent's bad faith. Royal relies onJohns v. Ariz. Fire Ins. Co., 76 Wash. 349, 360-62, 136 P. 120 (1913) and on Restatement (Third) of Agency § 8.01 cmt. b (2006). Johns holds that when an agent breaches the duty of good faith and loyalty owed to a principal by arranging to profit from the agency in excess of his lawful compensation, the agent must account to the principal for such profits even if the principal did not suffer any injury as a result of agent's secret dealings. The Restatement states that an agent's breach of the agent's fiduciary obligation subjects the agent to liability to the principal. Here, there is no evidence that Brady made any secret profits as a result of the statements it made to the Klukwan insureds, nor that Brady breached a fiduciary obligation. When Brandon Allen told the Klukwan insureds that Royal was acting in bad faith by denying coverage, he spoke truthfully.
Royal also argues that Fletcher, which involved an occurrence-based insurance policy, does not apply in the context of claims-made policies. This argument would be well taken if Brady was not Royal's agent. See Safeco Title Ins. Co. v. Gannon, 54 Wn. App. 330, 774 P.2d 30 (1989) (notice/prejudice rule does not apply to claims made after termination of a policy period in a claims-made policy because this would provide coverage the insured did not pay for). But because Brady was Royal's agent, the claim against the insureds was timely reported to Royal. In this situation,Fletcher is on point and the only question is whether Royal suffered any prejudice as a result of Brady's alleged delay in forwarding the policy to a Royal employee. Royal has failed to show prejudice arising from the delay between June 9, 2003 when Brady received the Sokol letter and November 7, 2003 when Brady forwarded the Sokol letter to Natalie Avena.
Royal contends that the Fletcher proximate cause analysis does not override the parties' broad indemnification clause. Royal maintains that interpreting the indemnity clause to require a showing of proximate cause would render the indemnification clause "virtually meaningless." The indemnification clause states:
C. The Agency shall indemnify and hold The Company harmless for all losses and costs resulting from any negligent act, omission, intentional misconduct or unauthorized transaction by The Agency or persons under the control of or contract with The Agency.
Clerk's Papers at 895, emphasis added.
Courts interpret insurance policies as a matter of law. State Farm Fire Cas. Co. v. Rye, LLC, 142 Wn. App. 6, 12, 174 P.3d 1175 (2007). Insurance policies are contracts, and courts seek to determine the contracting parties' intent by resorting to a fair, reasonable, and sensible construction of the contract's language, as the average insurance purchaser would understand it. State Farm Fire Cas. Co., 142 Wn. App. at 12. In general, courts will enforce an insurance contract as written if the contract is clear and unambiguous. State Farm Fire Cas. Co., 142 Wn. App. at 12-13. If a policy leaves a term undefined, courts give the term its plain, ordinary, and popular meaning. State Farm Fire Cas. Co., 142 Wn. App. at 13.
Here, the plain and ordinary meaning of "resulting from" is that no indemnity is owed absent a showing that the agent's negligent act, omission, intentional misconduct or unauthorized transaction caused the company harm. Interpreting the clause in this way does not render the clause meaningless.
Whether the issue is analyzed under Fletcher or the indemnity clause, Royal must show that Brady caused damage to Royal. Because Royal received timely notice of the claim through notice to Brady, it cannot be said that Brady's disparaging remarks exposed Royal to unfounded litigation. Royal's exposure to litigation resulted from its own unfortunate decision to deny coverage to the Klukwan insureds.
EQUITABLE INDEMNITY
Royal contends the trial court erred in dismissing its claim for equitable indemnification from Brady. Equitable indemnity is one of the recognized equitable grounds under which attorney fees can be awarded. Tradewell Group, Inc. v. Mavis, 71 Wn. App. 120, 126, 857 P.2d 1053 (1993). To be eligible for equitable indemnity from Brady, Royal would have to show that Brady's negative comments were the sole cause for Brady being named as a bad faith defendant by the Klukwan insureds. Tradewell Group, Inc., 71 Wn. App. at 128. Royal cannot make this showing. Royal had an obligation to provide coverage, and caused its own problems by failing to do so.
Timely notice of the claim to Brady was notice to Royal. Because it cannot be said that Brady caused Royal to be sued, the trial court did not err when it granted Brady's motion for summary judgment.
Affirmed.
WE CONCUR: