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Cox v. Continental Casualty Company

United States District Court, W.D. Washington, Seattle

November 21, 2014

KATHRYN COX et al., Plaintiffs,
v.
CONTINENTAL CASUALTY COMPANY, Defendant.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

MARSHA J. PECHMAN, Chief District Judge.

THIS MATTER comes before the Court on Defendant Continental Casualty Company's Motion for Summary Judgment (Dkt. No. 98) and Plaintiffs' Motion for Partial Summary Judgment (Dkt. No. 109). Having reviewed the Motions, the Responses (Dkt. Nos. 111, 116), the Replies (Dkt. Nos. 114, 123), and all related papers, and having heard oral argument on November 14, 2014, the Court hereby DENIES Continental's Motion in part and GRANTS it in part and DENIES Plaintiffs' Motion in part and GRANTS it in part.

Background

This case was brought by the Cox Plaintiffs, assignees of Dr. Duyzend, against Dr. Duyzend's insurer, Continental Casualty Company, alleging bad faith, breach of contract, negligence, and consumer protection violations in Continental's handling of hundreds of dental malpractice claims (including Plaintiffs') against Dr. Duyzend. (Compl., Dkt. No. 1-1 at 5.) On Continental's prior motion to dismiss, the Court dismissed Plaintiff's Insurance Fair Conduct Act ("IFCA") claim but allowed the other claims to proceed. (Dkt. No. 56.) Plaintiffs moved for reconsideration on the dismissal of the IFCA claim, and the Court denied the motion. (Dkt. No. 73.)

The events and circumstances giving rise to Plaintiffs' bad faith claim took place over the course of approximately four years. After dentist Dr. Duyzend retired in December 2007 and sold his practice, the dentist who had purchased the practice, Dr. To, began to notice a pattern of substandard, failing, and unnecessary root canals, among other problems attributable to Dr. Duyzend's dental work. (See To Interrogatory Answers at Arbitration, Dkt. No. 103, Ex. 7 at 3; To Decl., Dkt. No. 103, Ex. 8 at 3-8.) In a 2008 suit Dr. To filed against Dr. Duyzend for misrepresenting the nature of his practice and its profits, Dr. To alleged, "[t]he vast majority of patients have multiple root canals; several with over 20 and some as many as 28." (Dkt. No. 103, Ex. 7 at 8.) Dr. To further claimed Dr. Duyzend had falsified patient charts and used an electric vitality testing device with the batteries removed to generate documentation justifying unnecessary root canals. (Id. at 9.)

Dr. Duyzend had purchased an insurance policy with $8 million aggregate and $5 million per-claim limits from Continental in 2007. (Dkt. No. 103, Ex. 1 at 1.) The policy provided that Continental would "not settle any claim without your consent, " excluded coverage for intentional acts, and contained a void-for-fraud provision and a limitation of liability. (Dkt. No. 103, Ex. 2 at 73, 74-75, 59.) Mr. Versnel first heard about the claims in late April or early May 2008, and Continental formally retained him to represent Dr. Duyzend on or around May 8, 2014. (Versnel Decl., Dkt. No. 104 at 2.) In his deposition Mr. Versnel testified that during an early conversation between Mr. Versnel and Dr. To, Mr. Versnel supplied the name of Mr. Longfelder, a solo practitioner who had experience with dental malpractice cases, as an attorney to whom Dr. To might refer his patients (along with one or two other names). (Versnel Dep., Dkt. No. 103, Ex. 62 at 111:7-112:3.) (Continental disputes the suggestion that Plaintiffs would not have heard about Mr. Longfelder but for Dr. To, arguing that Dr. To and his office assistant referred patients to Mr. Longfelder-these facts may or may not be inconsistent. (See, e.g., 5/8/2014 Letter from Dr. To to patients, Rosato Decl. in Support of Pl's Opp., Dkt. No. 112, Ex. 2 at 30.))

Although Dr. Duyzend's policy excluded coverage for intentional conduct (Dkt. No. 103, Ex. 2 at 74-75), no reservation of rights on intentional conduct was issued at this time. (See Versnel Dep., Dkt. No. 103 at 42:7-44:19; Hoffman Dep., Dkt. No. 112, Ex. 1 at 92:20-94:21.) Neither Mr. Versnel nor anyone at Continental attempted to estimate the aggregate value of the claims against Dr. Duyzend either in settlement or at trial until at least 2011 and possibly 2012. (Versnel Dep., Dkt. No. 103 at 116:4-117:20; Kunz Dep., Dkt. No. 110 at 69:12-70:17, 78:5-80:13; 79:13-21; Hoffman Dep, Dkt. No. 112, Ex. 1 at 96:19-97:5.) Furthermore, Continental's initial claims adjustor on the Duyzend matters, Doug Hoffman, failed to elevate the claims to CLEM, the special unit at Continental whose function was to address high value (in excess of $1 million) or complex claims. (Hoffman Dep., Dkt. No. 112, Ex. 1 at 95:10-21, 96:7-18, 191:4-192:1.)

The period from May 2008 through summer 2011 is subject to a great number of factual disputes between the parties about to what degree the strategies employed by Mr. Versnel, Continental, and Dr. Duyzend on the one hand and Mr. Longfelder on the other hand were reasonable in light of the circumstances. The parties particularly dispute the source of the delays in settling claims. It is, however, undisputed that Mr. Versnel employed a claim-by-claim approach to settling cases and generally expected Mr. Longfelder to supply records and demands prior to making settlement offers. (Longfelder Dep., Dkt. No. 103 at 83:4-12 (Versnel communicated to Longfelder that CNA was going to handle claims on an individual basis); Versnel Dep., Dkt. No. 103, Ex. 62 at 33:23-34:8 (most common way to get records presuit is through plaintiff's counsel); 36:25-37:21 ("[W]e were relying on Mr. Longfelder to get us the records."); see also Longfelder Dep., Dkt. No. 103, Ex. 17 at 48:16-22 (Longfelder believed it was reasonable for Versnel to ask him to obtain records).) It is also undisputed that Mr. Longfelder was a solo practitioner and that he privately decided to employ a first-retained, firstsettled method of submitting patient records and demands to Mr. Versnel. (Longfelder Dep., Dkt. No. 112, Ex. 3 at 222:10-15 (Longfelder agrees he was handling cases in the order in which he was retained); Versnel Dep., Dkt. No. 103, Ex. 62 at 50:19-51:9 (solo practitioner); 30:23-316 (first-in-first-out method unknown to Versnel until he read Longfelder's deposition).) Many of these choices, assumptions, and/or staffing realities may have contributed to delays in the handling of the claims against Dr. Duyzend.

In addition to any delays occasioned by counsel, Continental had assigned an adjustor, Mr. Hoffman, who lacked any sense of urgency. (See, e.g., Dkt. No. 112, Ex. 26 (emails from Mr. Versnel to Mr. Hoffman expressing increasing frustration with Mr. Hoffman's delays in paying settlements, experts, vendors, and even Mr. Versnel himself; returning calls; and performing other tasks); Ex. 28 (memo written by Mr. Versnel's associate regarding possibility of bad faith claim arising from "tardy settlement checks" and "failure to respond to settlement demands"); Ex. 29 (email from dental expert to Mr. Versnel explaining that after failing to receive payment for eight months, he would hold Mr. Versnel rather than Continental responsible for the nonpayment, and complaining that "Mr. Hoffman has not been forthright with me"); Ex. 30 (emails indicating the time between the date a pro se's demand for payment for reparative dental work was communicated to Mr. Hoffman and the date an actual settlement check was issued was more than a year); Ex. 45 (email from Mr. Versnel to Mr. Hoffman explaining delays in being permitted to bill for claimants represented by Mr. Russo "is really creating hardship for me").) Mr. Hoffman was eventually fired, but Mr. Hoffman and his supervisor claim it was not for his delays in handling such an important matter; rather, they say he was fired for exceeding his settlement authority without permission. (See Kunz Dep., Dkt. No. 112, Ex. 58 at 72:9-76:11; Hoffman Dep., Dkt. No. 112, Ex. 1 at 5012-14.)

Furthermore, some delays related to the retrieval of patient records could be attributed to third parties-although Continental sometimes had a role in selecting the third-party vendors or otherwise arguably aggravating the problem. For example, in 2010 Mr. Versnel asked Continental for permission to stop using the Continental-approved Compex, a vendor providing copying services, because "they are very difficult to deal with and not in any form competent. I feel they have been an impediment to our work up of the Duyzend as well as other cases. The Duyzend cases are heating up and obtaining records in a timely manner is even more important than before." (Dkt. No. 112, Ex. 70 at 1 (4/7/2010 Versnel-Hoffman email).) At one point in 2011, Mr. Versnel explained that Dr. To was withholding records until he received payment for x-rays from Continental. (Dkt. No. 112, Ex. 60 at 1 (12/6/2011 Versnel-Lampe email).) Dr. To's office assistant, April McCartney, stated that late payment of Dr. To "was an issue" and that she "kind of remembered" Dr. To refusing to provided additional records to Mr. Versnel because Dr. To was not being paid by Continental. (Dkt. No. 112, Ex. 69, 96:7-21.)

Attorneys other than Mr. Longfelder who represented Duyzend patients tended to settle for higher amounts, brought CPA and intentional tort claims, and presented a greater threat of taking their cases to trial and achieving runaway jury verdicts. (See Dkt. No. 112, Ex. 17-18 (disparity in settlement amounts between Longfelder and Russo clients); Versnel Dep., Dkt. No. 103, Ex. 62 at 266:13-20 (different types of claims brought by Longfelder versus other attorneys); id. at 49:13-504, 52:8-53:17 (Versnel's estimates of relative willingness of Longfelder, Russo, and PWRLK to take cases to trial).) Dr. Duyzend had warned in 2009 and 2010 that delays might jeopardize settlements and cause claimants to transfer to more aggressive attorneys (Dkt. No. 112, Ex. 42 at 60, 63), and numerous claimants including the Plaintiffs in this case did leave Mr. Longfelder in favor of Mr. Russo and the firm later known as PWRLK. Ultimately, Plaintiffs, represented by PWRLK, took the case to arbitration and won a verdict of $35, 212, 000. (See Dkt. No. 112, Ex. 64.) The lowest amount the firm had offered prior to arbitration was $16 million; it is not clear whether Dr. Duyzend considered this offer specifically but he had previously insisted on a reservation of $50, 000 to ensure continued defense by Continental and less than $1 million remained on the policy at the time of the offer. (Dkt. No. 103, Ex. 53 at 1; Dkt. No. 117, Ex. 58 at 3-4, Ex. 59 at 2.)

Analysis

I. Legal Standard

Federal Rule 56(a) provides that the court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). In determining whether a factual dispute requiring trial exists, the court must view the record in the light most favorable to the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). All material facts alleged by the nonmoving party are assumed to be true, and all inferences must be drawn in that party's favor. Davis v. Team Elec. Co., 520 F.3d 1080, 1088 (9th Cir. 2008).

A dispute about a material fact is "genuine" only if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248. There is no genuine issue for trial "[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

II. Fraud

Continental argues it is entitled to summary judgment on the basis that Dr. Duyzend committed fraud "during the claims process" with Continental. (Dkt. No. 98 at 17-19.) Specifically, Continental claims Dr. Duyzend perpetrated insurance fraud by denying to his Continental-appointed counsel that he committed fraud on his patients. (Id. at 18.) Because the arbitrator in the underlying litigation later held that Dr. Duyzend did commit fraud on his patients, Continental argues Plaintiffs, who stand in Dr. Duyzend's shoes, are collaterally estopped from denying that fraud in this bad faith litigation. (Id.)

Plaintiffs counter that 1) Continental is estopped from asserting fraud or misrepresentation as a defense to bad faith because it did not timely assert the defense through a reservation of rights and 2) it is judicially estopped because Continental represented to the Court during discovery that coverage was not at issue in this bad faith litigation and successfully asserted attorney-client privilege on all coverage matters. (Dkt. No. 111 at 11-12.) Regarding the merits of the fraud claim, Plaintiffs argue that the alleged misrepresentations do not constitute fraud or misrepresentation under the "void for fraud" provision of Dr. Duyzend's policy with Continental. The definition of fraud which voids the policy is "any case of fraud by you relating to [the policy]" or where the insured "intentionally conceal[s] or misrepresent[s] a material fact or circumstance concerning [...] this policy." (Id. at 14, quoting Dkt. No. 103, Ex. 2 at 59.) In addition, Plaintiffs point out collateral estoppel is not dispositive because the issues are not identical-here, the issue is fraud concerning the treatment of patients versus fraud on the policy. (Dkt. No. 111 at 16.) Finally, Plaintiffs attempt to distinguish the fraud line of cases on the basis that they concern first-party insurance rather than third-party insurance and do not involve assertions by the insured defending his or her conduct in underlying third-party litigation. (Id. at 15-16.)

In its Reply, Continental responds that it is not trying to void the policy, but rather to defend against excess liability; it implies a common law defense rather than the "void for fraud" provision of the policy applies. (Dkt. No. 114 at 5.) In response to the judicial estoppel argument, Continental contends it is not disputing coverage, but solely excess liability. (Id. at 6.) Finally, Continental admits the matter on which Plaintiffs are collaterally estopped is the fact that Dr. Duyzend committed fraud on his patients, not the final issue of fraud to Continental about the fact of ...


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