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Merriman v. American Guarantee & Liability Insurance Co.

Court of Appeals of Washington, Division 3

April 11, 2017

WILLIAM MERRIMAN AND COLLEEN MERRIMAN, husband and wife, Appellants,

          SIDDOWAY, J.

         William and Colleen Merriman brought a negligence action against Bemd Moving Systems after a fire at Bernd's storage warehouse destroyed over $300, 000 worth of the Merrimans' property. When the Merrimans learned through litigation that Bernd had substantial insurance protecting its storage customers against property loss that had never been disclosed by Bernd's insurer, its adjuster, or the adjuster's local agent, they amended their complaint to assert claims against all three companies. They also moved, successfully, for certification of a class action. Settlements were reached between the class and Bernd, the insurer, and the adjuster's local agent.

         No settlement was reached with the adjuster, York Risk Services Group (York), and the trial court eventually decertified the class and granted summary judgment dismissal of the Merrimans' claims against it. We reverse the dismissal of the Merrimans' claims against York for insurance bad faith, negligent misrepresentation, and non per se violations of Washington's Consumer Protection Act (CPA).[1] We also reverse dismissal of the Merrimans' negligence claim in light of York's broad contractual claims administration undertakings, which were intended in part to benefit insureds. Finally, having reinstated two claims that were never decertified as class actions, we direct the trial court to reexamine its decertification of the negligent misrepresentation, negligence, and non per se CPA claims.


         On August 5, 2012, a storage warehouse in Yakima owned and operated by Bernd Moving Systems burned to the ground. In addition to destroying the warehouse itself, the fire destroyed Bernd's personal property and the property of 38 of its customers who stored property in the warehouse-among them, the Merrimans.

         Over $300, 000 worth of the Merrimans' property was destroyed in the fire. Before placing property in storage at the Bernd warehouse, the Merrimans had been told by Doug Bernd that their property would be fully insured. Following the fire, they spoke with a representative of Bernd who told them they would be contacted by insurance representatives.

         Bernd was insured by American Guarantee & Liability Insurance Company (American Guarantee). Its commercial insurance policy provided many types of property and liability coverage. American Guarantee engaged York to not only adjust claims for the Bernd warehouse fire, but to more broadly administer the entire review, adjustment, settlement, and payment process under a preexisting third party administrator agreement between its parent company and York.

         York, in turn, engaged Partners Claim Services, Inc. (Partners) to serve as its '"boots on the ground'" for the Bernd claims administration engagement. Br. of Resp't at 1. It was Partners whose representatives communicated with the Merrimans and other insurance claimants.

         Within two days of the fire, York's field adjuster had reviewed Bernd's insurance policy with American Guarantee and seen that property provisions of the policy insured not only Bernd's business personal property from loss or damage but also covered "Personal property of others in your care, custody and control." Clerk's Papers (CP) at 2037, 1881.[3] The policy form went on to provide, "[O]ur payment for loss of or damage to personal property of others will only be for the account of the owner of the property." Id. Blanket limits of Bernd's business and personal property coverage were $777, 500, and $435, 000 of coverage for property loss was available under a commercial inland marine policy if Bernd were found liable for the loss.

         American Guarantee would ultimately concede that Bernd's policy covered the Merrimans' and other storage customers' property loss but it never disclosed the coverage to the Merrimans. It claimed it relied on York to perform its "contractual job duties, " including to make required disclosures of coverage to potential insureds. CP at 2760-61, 2848-49.

         York agreed that covered business personal property included customer property stored at the warehouse, but it did not provide a copy of the policy to Partners nor inform Partners of coverage for those property owners. Instead, York instructed Partners to tell property owners that Partners did not know what Bernd's coverages were, or whether its policy would apply to their loss. It further instructed Partners to tell property owners they should file a claim under their own homeowner's insurance, which might expedite payment for their loss. During discovery, York's CR 30(b)(6) designee admitted that in light of the limited information it provided to Partners, no property owner could expect to get a full explanation of the coverage provisions in Bernd's policy.

         Mr. Merriman's communications about Bernd's policy's coverage for the Merrimans' property loss began with a call from Liz Bowers, a Partners employee, 12 days after the fire. In contacting property owners, Ms. Bowers informed them she was calling on behalf of York, who was managing claims on behalf of the insurance company. She told Mr. Merriman she would be handling the Merrimans' claim for their property loss. She initially told him she would send him forms for preparing an inventory and hoped to meet with all of the property owners and take them through the claim process. Shortly thereafter, however, she told Mr. Merriman not to bother with the inventory because there would most likely be no coverage under Bernd's policy. In another, later call, she repeated it would be a waste of time to put together an inventory because there would likely be no coverage for the Merrimans' goods under Bernd's policy. She left Mr. Merriman with the impression that the couple's only source of recovery would be through their own homeowner's policy. Their homeowner's policy covered only $15, 000 of their loss.

         After learning that the warehouse fire was likely caused by a cigarette left burning by a Bernd employee, the Merrimans sued Bernd for negligence. Through discovery, the Merrimans obtained a copy of Bernd's policy. They learned it included a $3 million limit on liability coverage. But they also learned for the first time of the earlier undisclosed property coverage, which applied whether or not Bernd was at fault. They amended their complaint to address the failure to disclose the coverage, naming American Guarantee, York, and Partners as additional defendants and framing a later complaint as a class action. The trial court granted the Merrimans' motion to certify a class action.

         Partners settled a couple of months after entry of the order certifying the class action. The fairness and reasonableness of its settlement was approved by the court.

         While American Guarantee conceded that Bernd's policy covered the Merrimans' and other storage customers' property, it, and York, have always contended that Bernd's customers were not insureds with first party claims, but were instead third party claimants, and that only Bernd could have made a claim for their property losses. York also contended that as an adjuster rather than an insurer, it could not be sued for insurance bad faith and did not owe any of an insurer's statutory or regulatory duties to insureds.

         After motions for summary judgment resulted in the dismissal of some of the claims asserted against York-those characterized as "insurance" claims-York moved to decertify the class as to the remaining claims against it, arguing that liability for those claims (negligent misrepresentation, constructive fraud, and non per se CPA claims) were individualized. The trial court granted the motion. York then moved again for summary judgment of the three remaining claims, and the court granted the motion.

         American Guarantee never sought decertification. Instead, it reached a settlement with the class that the court found to be fair and reasonable in November 2015.

         The Merrimans appeal.


         The Merrimans appeal dismissal of their claims against York for insurance bad faith, negligent misrepresentation, negligence, and violation of the CPA. They also appeal decertification of the class.

         We first address a threshold issue of whether the Merrimans' claim under the property provisions of the policy is a first party claim by an insured or a third party claim. We then address the dismissal of their claims for insurance bad faith, negligent misrepresentation, negligent claims handling, and violation (per se and non per se) of the CPA, in the order stated. We conclude with their challenge to the decertification of the class.

         I. The Merrimans' claim is a first party claim, as an insured

         Standards of review, interpretation, and construction

         When resolving issues involving the interpretation of an insurance contract, summary judgment is appropriate unless relevant terms of the contract are ambiguous and the parties introduce conflicting evidence to clarify the ambiguity. Nat'l Gen. Ins. Co. v. Sherouse, 76 Wn.App. 159, 162, 882 P.2d 1207 (1995). The parties did not offer conflicting evidence to resolve an ambiguity below; both agreed there and agree on appeal that Bernd's policy may be interpreted and construed as a matter of law. We review an order denying summary judgment de novo, engaging in the same inquiry as the trial court. Ruvalcaba v. Kwang Ho Baek, 175 Wn.2d 1, 6, 282 P.3d 1083 (2012).

         A contract of insurance should be given a fair, reasonable and sensible construction, consonant with the apparent object and intent of the parties, a construction such as would be given the contract by the average person purchasing insurance. Morgan v. Prudential Ins. Co. of Am., 86 Wn.2d 432, 434, 545 P.2d 1193 (1976). If the policy language is clear and unambiguous, the court may not modify the contract or create an ambiguity where none exists. Id. at 435. However, where the clause in the policy is ambiguous, a meaning and construction most favorable to the insured must be applied, even though the insurer may have intended another meaning. Id. (citing Glen Falls Ins. Co. v. Vietzke, 82 Wn.2d 122, 508 P.2d 608 (1973)).

         "The 'insured' under a contract of insurance is the person or entity that will receive a certain sum upon the happening of a specified contingency or event." 3 Steven Plitt et al., Couch on Insurance 3d § 40:1, at 40-3 (2016). Black's similarly defines "insured" as "[s]omeone who is covered or protected by an insurance policy." Black's Law Dictionary 928 (10th ed. 2014).

         "The insured may be named within the policy or may be identified by description such as 'employee, ' 'dependent, ' 'resident, ' or 'member' of a household, 'owner, ' or 'eligible debtor.'" Plitt, supra, § 40:3, at 40-6 (footnotes omitted). If the identification of who is insured requires interpretation and is susceptible of different conclusions, '"the one will be adopted most favorable to the insured; and will be liberally construed in favor of the object to be accomplished.'" Dennis v. Great Am. Ins. Co., 8 Wn.App. 71, 74, 503 P.2d 1114 (1972) (quoting Jack v. Standard Marine Ins. Co., 33 Wn.2d 265, 271, 205 P.2d 351 (1949). Careful consideration of any definition of "insured" in the policy must be made. PLITT, supra, §40:1, at 40-4.

         "Insured" is undefined by Bernd's policy for the personal property coverage that remains at issue in this case. Bernd's policy consists of a number of policy forms, each addressing a particular type of coverage. Only one of the forms, the commercial general liability coverage form, contains a "Who is an Insured" section. See CP at 278-296, specifically at 286.

         By contrast, the coverage form relevant here, the building and personal property coverage form, speaks of "Covered Property" rather than addressing who is an "Insured." E.g., CP at 224. Section 5 of the form, "Coverage Extensions, " provides at subsection (b) that Bernd "may extend the insurance that applies to Your Business Personal Property to apply to .. . (2) Personal property of others in your care, custody or control, " and further states, "Our payment for loss of or damage to personal property of others will only be for the account of the owner of the property." CP at 230. Bernd secured such an extension of coverage, addressed by a property basket coverage endorsement, which amended the building and personal property coverage form as follows:

The following paragraph is added to b. Your Business Personal Property of paragraph 1. Covered Property of section A. Coverage:
Personal property of others in your care, custody and control. However, our payment for loss of or damage to personal property of others will only be for the account of the owner of the property.

CP at 198.

         This language clearly and unambiguously includes as covered property personal property of the Merrimans and other customers that was in Bernd's care, custody and control at the time of the covered loss.

         The statement that "our payment for loss of or damage to personal property of others will only be for the account of the owner of the property" also appears to clearly and unambiguously contemplate that American Guarantee will pay the loss to the owner of the property-unlike policy language seen in other cases, such as "' [L]oss shall be adjusted with the named insured for the account of the owners of the property, '" language used in the policy at issue in Stanley Fine Furniture, Inc. v. North River Insurance Co., 411 So.2d 210, 211 (Fla. Dist. Ct. App. 1982) (emphasis added).[4]

         York argues, however, that one can infer from the types and limits of coverage Bernd purchased that the building and personal property coverage was only intended to cover the replacement cost of Bernd's building and its own property. But the policy covered any loss, not just a total loss, and the endorsement modifying the covered property section of the coverage form plainly extends coverage to property of others. Policy limits are not required to cover all possible loss, and Washington courts allow an insurer to "limit[ ] its liability to a specified dollar amount" even when that limit prevents "full compensation for insureds." Certain Underwriters at Lloyd's, London v. Valiant Ins. Co., 155 Wn.App. 469, 478, 229 P.3d 930 (2010).

         York also argues that if the Merrimans and other storage customers were insureds, American Guarantee would owe conflicting duties to Bernd and the other insureds, because limits of the coverage fell short of their combined loss. But this is not a rare occurrence, and it is addressed by case law. See, e.g., Allstate Ins. Co. v. Ostenson, 105 Wn.2d 244, 246, 713 P.2d 733 (1986) (interpleader was used, and the court was asked to determine whether a "per person" limitation under policy would control over the general rule of distributing on a pro rata basis in accordance with the amount of damage suffered by each claimant).

         York next points to the loss payment section of the building and personal property coverage form, which provides, in part, that American Guarantee "may adjust losses with the owners of lost or damaged property if other than you, " and thereby satisfy "your claims against us for the owners' property." CP at 233 (§ 4(e)). (Here, as elsewhere, "you" and "your" mean "Bernd, " which we substitute hereafter.) This paragraph of the loss payment section advances York's argument, but language elsewhere in the section undercuts its position. Paragraph (e) allows American Guarantee to pay other owners "their financial interest in the Covered Property" and paragraph (d) states that the insurer "will not pay [Bernd] more than [Bernd's] financial interest in the Covered Property"- contradicting York's contention that American Guarantee could pay Bernd for both its own financial interest and whatever additional amount (within limits) was needed to cover the financial interests of its customers. Id. (§ 4(d)).

         York also points to paragraph 4(f) of the loss payment provision, which allows American Guarantee to defend Bernd "against suits arising from claims of owners of property." Id. According to York, this language means that other owners must assert claims for covered property against Bernd. But York has never identified a legal theory the owners could advance if Bernd was not at fault for their property loss. As the Merrimans point out, under Bernd's comprehensive general liability coverage, they and other storage customers asserted viable negligence claims against Bernd, which could be enforced against any of Bernd's assets, including its rights to payment under other coverages. Perhaps that is what the paragraph envisions.

         Both American Guarantee and the Merrimans have sometimes analogized the building and personal property coverage to warehouseman's policies. The Merrimans have pointed to § 68:40 of Couch on Insurance, which states:

Where the bailee or warehouseman has effected insurance in favor of the bailor, the latter is entitled to the proceeds to the extent of his or her insurable interest, without regard to whether the bailee or warehouseman procured the policy voluntarily, or pursuant to an agreement, express or implied, to carry insurance.... A person having possession of goods of another may insure for the benefit of the latter without authority, and the latter may adopt the policy so as to recover insurance collected, in proportion to the value of the owner's goods lost.

Reply Br. at 6 & n.5; 5 PLITT, supra, § 68:40, at 68-63. The Merrimans cite cases from other jurisdictions supporting a bailor's right to sue the insurer for coverage. See id.; cf. Clausen v. Columbia Nat. Ins. Co., 1 Neb.App. 808, 816, 510 N.W.2d 399, (1993) (insurer did not challenge property owner's right to bring third party claim under same "covered property" provision at issue here; a directed verdict should have been entered in favor of property owner as to the property being within the "care, custody and control" of named insured).

         American Guarantee, whose policy interpretation is embraced by York, also raised warehouseman's insurance in the trial court, directing the court to § 242:82 of the Couch treatise, which explains that "[t]he bailee's policy of insurance may be so worded that it does not give rise to any cause of action in favor of the bailor, " and that "where a policy contains a clause making the loss payable to and adjustable with the bailee ... it may be inferred that the insurer does not intend to assume a direct liability to the owners." Report of Proceedings at 219; 17 Couch, supra, ยง242:82. American Guarantee's building and ...

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