United States District Court, W.D. Washington, Seattle
ORDER DENYING DEFENDANT ARCH INSURANCE COMPANY'S
MOTION FOR SUMMARY JUDGMENT
S. Lasnik, United States District Judge.
matter comes before the Court on “Defendant Arch
Insurance Company's Motion for Summary Judgment.”
Dkt. # 97. Arch is an excess insurer on a financial
institution blended policy issued to Washington Mutual Bank
(“WaMu”) starting in May 2006. It seeks a summary
determination (a) that the policies do not cover fraudulent
mortgages originated prior to the policy period and/or (b)
that the claimed losses are indirect and do not trigger
coverage under the terms of the policy. WaMu collapsed in
2008, and the United States Office of Thrift Supervision
placed it into receivership with the Federal Deposit
Insurance Corporation (“FDIC”). The FDIC is
pursuing a claim for insurance coverage that WaMu made in
2007. The FDIC opposes Arch's motion and requests that it
be denied or, in the alternative, that the Court defer ruling
under Fed.R.Civ.P. 56(d)(2).
judgment is appropriate when, viewing the facts in the light
most favorable to the nonmoving party, there is no genuine
issue of material fact that would preclude the entry of
judgment as a matter of law. The party seeking summary
dismissal of the case “bears the initial responsibility
of informing the district court of the basis for its
motion” (Celotex Corp. v. Catrett, 477 U.S.
317, 323 (1986)) and “citing to particular parts of
materials in the record” that show the absence of a
genuine issue of material fact (Fed. R. Civ. P. 56(c)). Once
the moving party has satisfied its burden, it is entitled to
summary judgment if the non-moving party fails to designate
“specific facts showing that there is a genuine issue
for trial.” Celotex Corp., 477 U.S. at 324.
The Court will “view the evidence in the light most
favorable to the nonmoving party . . . and draw all
reasonable inferences in that party's favor.”
Krechman v. County of Riverside, 723 F.3d 1104, 1109
(9th Cir. 2013). Although the Court must reserve for the jury
genuine issues regarding credibility, the weight of the
evidence, and legitimate inferences, the “mere
existence of a scintilla of evidence in support of the
non-moving party's position will be insufficient”
to avoid judgment. City of Pomona v. SQM N. Am.
Corp., 750 F.3d 1036, 1049 (9th Cir. 2014); Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).
Factual disputes whose resolution would not affect the
outcome of the suit are irrelevant to the consideration of a
motion for summary judgment. S. Cal. Darts Ass'n v.
Zaffina, 762 F.3d 921, 925 (9th Cir. 2014). In other
words, summary judgment should be granted where the nonmoving
party fails to offer evidence from which a reasonable jury
could return a verdict in its favor. FreecycleSunnyvale
v. Freecycle Network, 626 F.3d 509, 514 (9th Cir. 2010).
reviewed the memoranda, declarations, and exhibits submitted
by the parties,  the Court finds as follows:
early 2000s, WaMu contracted with third parties to have them
originate residential real property mortgage loans which WaMu
agreed to purchase. In March 2004, WaMu discovered that a
mortgage originated by CIP Mortgage Corporation was based on
a misstatement regarding the borrower's income: the
application showed annual income of approximately $150, 000,
but the relevant tax return showed income of less than $15,
000. WaMu brought the problem to CIP's attention and
initiated a broader review. By June 2004, WaMu knew of eleven
loans, including two made to the Chief Executive Officer of
CIP, that were based on false income statements. WaMu's
Correspondent Area Risk and Risk Mitigation departments
concluded “that the borrowers misrepresented their
income and employment.” Dkt. # 173-4 at 3. Persons
involved in the loans, including CIP and its CEO, were placed
on a list of “Suspect Parties, ” CIP was
internally referred for further monitoring, and WaMu
repurchased the loans it had sold to Fannie Mae. In July
2004, WaMu notified CitiMortgage that it had identified two
more fraudulent loans originated by CIP. WaMu notified CIP of
its findings and requested that it repurchase the loans. CIP
agreed to do so and fired the processor who originated the
loans. At approximately the same time, however, WaMu
discovered that CIP's 2003 net worth was less than 1/10th
what it had been in 2002, in large part due to a “huge
distribution” to shareholders. Dkt. # 99 at 40-41. On
September 2, 2004, WaMu notified CIP that its selling
privileges for WaMu had been suspended.
to September 2005, WaMu purchased three fraudulent loans from
another mortgage company, Coastal Capital.
spring of 2006, WaMu's insurance broker negotiated
changes to the blended policy underlying Arch's excess
layer. The underwriters agreed to define the term “Loan
Originator” and granted certain specified coverages
related to their services, effective May 1, 2006. Pursuant to
the policy in place in 2007-2008, the underwriters agreed to
indemnify WaMu for “[l]oss resulting directly from
dishonest or fraudulent acts committed by an Employee acting
alone or in collusion with others.” Dkt. # 1-1 at 25.
An “individual and/or company[, ] which originates
mortgage loans purchased by the Insured” is an Employee
under this coverage provision. Dkt. # 1-1 at 35.
September 18, 2007, a defendant in a pending criminal matter
notified WaMu that over 100 of the mortgages originated by
CIP for WaMu were actually unsecured. WaMu conducted an
investigation and found that CIP prepared fraudulent
paperwork, including loan applications, mortgages, notes, and
title insurance, to make it look like a third party was
borrowing money that was secured by real property owned or
controlled by CIP's CEO. In fact, the CEO and others
involved in the fraud fronted just enough money to get
through settlement, then sold the loans to WaMu and pocketed
the proceeds without ever recording the mortgage, paying
taxes, or purchasing insurance. The CEO and/or his companies
would make monthly payments on the loan so that they appeared
legitimate. The properties that were supposedly securing
WaMu's loan were often sold to end-users, thereby
compromising WaMu's position in the chain of title. WaMu
concluded that it had purchased 124 fraudulent loans for $53,
344, 641.16. WaMu notified the underwriters of the loss on
November 21, 2007.
parties agree that the underlying bond is to be interpreted
under Washington law. Insurance policies are construed
“as contracts, giving them a fair, reasonable, and
sensible construction as would be given to the contract by an
average person purchasing insurance.” Xia v.
ProBuilders Specialty Ins. Co., 188 Wn.2d 171, 181
(2017) (internal quotations marks omitted). Undefined terms
are given their plain and ordinary meaning and, if the policy
language is clear and unambiguous, it will be applied as
written. Id. Where there is an ambiguity coverage
provisions are liberally construed in favor of coverage while
exclusions are strictly construed against the insurer.
Ross v. State Farm Mut. Auto. Ins. Co., 132 Wn.2d
507, 523 (1997). If an insured shows that the loss falls
within the coverage provision, the insurer must show that it
is excluded by specific policy language. Moeller v.
Farmers Ins. Co. of Wash., 173 Wn.2d 264, 272 (2011).
Definition of “Employee”
argues that the losses at issue do not trigger the obligation
to indemnify because, at the time CIP and Coastal Capital
sold the fraudulent loans to WaMu, they were not
“Employees” covered under the fidelity bond. Arch
dedicates a significant amount of its memorandum recounting
when WaMu became aware that CIP had sold it bad loans and
when it ceased doing business with both loan originators.
Based on this time line, Arch obliquely mentions that it
would be unfair to force the insurers to cover a loss that
was known, but undisclosed, when the coverage first went into
effect. The “known loss doctrine” applies in
Washington and can, in certain circumstances, bar recovery on
an insurance claim for a loss that the insured subjectively
knew had already or would occur. See Hillhaven Props.
Ltd. v. Sellen Const. Co., Inc., 133 Wn.2d 751, 758
(1997). Arch does not, however, argue that WaMu knew, as a
matter of law, that the loan originators had engaged in fraud
(as opposed to negligence or recklessness) prior to May 2006.
Arch is not, therefore, arguing that there was a known loss,
but rather that the fidelity bond covers only losses caused
by dishonest or fraudulent acts occurring during the policy
period by persons who were then employed by WaMu.
coverage can be offered on an occurrence or a claims-made
basis. “Occurrence policies generally provide coverage
for damage that occurs during the policy period regardless of
when the damage is discovered if notification is made within
a reasonable time. . . . By contrast, claims-made policies
generally provide coverage for claims which the insurer
receives notice of during the policy period regardless of
when the damage occurred.” Am. ContinentalIns. Co. v. Steen, 151 Wn.2d 512, 517 (2004). Arch
is implicitly arguing that WaMu purchased an occurrence
policy and that, because the alleged fraud occurred long
before the policy period began, there is no ...