Cincinnati Insurance Company v. Harry Johnson Plumbing & Excavating Co Inc

Filing 26

ORDER DENYING MOTION FOR SUMMARY JUDGMENT, denying 9 Motion for Summary Judgment. Signed by Senior Judge Lonny R. Suko. (LR, Case Administrator)

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WASHINGTON

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CINCINNATI INSURANCE
COMPANY,
Plaintiff/Counterclaim Defendant,

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ORDER DENYING MOTION FOR
SUMMARY JUDGMENT

v.

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Case No. 4:16-CV-5090-LRS

HARRY JOHNSON PLUMBING &
EXCAVATING CO., INC.,

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Defendant/Counterclaimant.

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BEFORE THE COURT is Harry Johnson Plumbing & Excavating Co., Inc.’s

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(“HJPE”) Motion for Summary Judgment (ECF No. 9). The Motion seeks dismissal

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of Cincinnati Insurance Company’s (“CIC”) claims for declaratory judgment
asserted in the Complaint (ECF No. 1). CIC is opposed (ECF No. 14-17). Defendant
has filed a Reply (ECF Nos. 19-23). Telephonic oral argument on the matter was

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heard on October 4, 2016. Plaintiff was represented by Bryana L Blessinger.

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Defendant was represented by Brian Sheldon.

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I.

BACKGROUND

HJPE’s initial Statement of Facts (ECF No. 10) are undisputed. See L.R. 56.1(d);
ECF No. 17 (CIC’s Statement of Facts acknowledging HJPE’s Statement of Facts

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and setting forth “additional pertinent facts.”). In Reply, HJPE disputes and/or

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clarifies the additional facts alleged by CIC. (ECF No. 22).

The parties do not

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contest the validity or authenticity of the insurance policy upon which CIC has relied
for its claims (ECF No. 1, Ex. 1), although the parties’ contest the policy’s
interpretation. The following facts are undisputed, unless otherwise noted.

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A. The CIC Policy

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Plaintiff Cincinnati Insurance Company (“CIC”) issued Policy Number

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ENP0227281 with effective dates of December 31, 2014 to December 31, 2015 (“the
CIC Policy” or the “Policy”) to Defendant/counterclaimant Harry Johnson Plumbing
& Excavation (“HJPE”) as the named insured. A copy of the Policy that CIC alleges

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to be true and correct is attached to and incorporated by reference in the Complaint.

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(ECF No. 1, Ex. 1). The policy insured “Contractors’ Equipment (and Tools).”

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1. Initial Pages
The Policy is allegedly 24-pages long. It begins with “Common Policy
Declarations,” followed by sections titled: “Washington Common Policy

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Conditions”; “Summary of Premiums Charged”; “Notice to Policyholders”;

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“Washington Exclusion of Certified Acts and Other Acts of Terrorism”; “Signature

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Endorsement”; “Contractors’ Equipment (and Tools) Coverage Part Declarations”;
and “Contractors’ Equipment (and Tools) Coverage Form Washington.”
The “Contractors’ Equipment (and Tools) Coverage Part Declarations” states in

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part:
FORMS AND/OR ENDORSEMENTS APPLICABLE TO CONTRACTORS’
EQUIPMENT (AND TOOLS)
MA108WA
06/07 CONTRACTORS’ EQUIPMENT (AND TOOLS)
COVERAGE FORM WASHINGTON
MA135WA
02/12 COMMERCIAL INLAND MARINE CONDITIONS
WASHINGTON
MA4061WA 02/12 WASHINGTON CHANGES.

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ECF No. 1, Ex. A at 18. See ECF No. 10, SOF 1.
The next pages are a series of endorsements, including the “Commercial

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Inland Marine Conditions Washington” endorsement (the “Inland Marine
endorsement”), containing the “Concealment, Misrepresentation or Fraud”
provision upon which CIC relies in its Complaint seeking declaratory relief.

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2. The Commercial Inland Marine Conditions Washington Endorsement

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The first words at the top of the Inland Marine endorsement read: “THIS

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ENDORSEMENT

CHANGES

THE

POLICY.

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READ

IT

CAREFULLY.” The introductory phrase of the endorsement states as follows:
The following conditions apply in addition to the Common Policy Conditions
and applicable Additional Conditions in Commercial Inland Marine Coverage
Forms. These conditions replace any similar conditions or clauses in any
Commercial Inland Marine Coverage forms:
(ECF No. 1, Ex. A at 26).
This endorsement’s “General Conditions” provision states:

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PLEASE

A. Concealment, Misrepresentation or Fraud
This Coverage Part is void in any case of fraud,
intentional concealment or misrepresentation of a

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material fact, by you or any other insured, at any time,
concerning:
1. This Coverage Part;
2. The Covered Property;
3. Your interest in the Covered Property; or
4. A claim under this Coverage Part.

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Id. at 27 (the “CMF provision”)
B. CIC’s Complaint for Declaratory Judgment
This dispute arises out HJPE’s reported theft and claim for coverage for the loss

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of a 1996 14H Caterpillar Road Grader from a location in Whitman County, near a

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bridge reconstruction project HJPE had performed for the County known as “the

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Hatley Bridge project.”

HJPE reported the loss on or about September 8, 2015.

CIC investigated the claim. On March 21, 2016, CIC’s counsel sent a letter to
HJPE’s counsel agreeing to “extend coverage for the 12G Grader that is scheduled

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on the Policy.” (ECF No. 10, SOF No. 8; ECF No. 11 at 31). On April 1, 2016,

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HJPE’s counsel informed CIC that its 12G grader had not been stolen and was still

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being used by HJPE. (ECF No. 10, SOF No. 9). By letter dated July 1, 2016, CIC
denied coverage for the 14H Grader. (ECF No. 11 at 5-14). On July 6, 2016, CIC
filed its Complaint for Declaratory Judgment (ECF No. 1) incorporating by reference
an attached copy of the insurance policy.
The Complaint alleges, among other allegations, that during the course of its

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investigation CIC discovered:
1. HJPE initially reported loss of a 12G road grader SN#61M6164, then later

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that same day reported it was a 14H Grader instead of a 12G (¶¶5, 7);
2. HJPE could not provide a serial number for the 14H Grader;

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3. HJPE’s October 16, 2015 Proof of Loss form alleged the purchase of the 14H
Grader in 2004 for $197,500, but in his examination under oath on February
8, 2016, HJPE owner Mark Johnson stated the purchase was in 2002 for

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$147,500 (¶¶8, 9).
4. “HJPE used a 12G Grader on the project,” but no one CIC interviewed

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“recalled seeing a 14H Grader at the project site.” (¶ 10)
5. Tax returns provided to CIC did not enable CIC “to determine what equipment
HJPE had claim[] depreciation on” (¶ 13); and

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6. HJPE refused to allow CIC to speak directly with HJPE’s accountant. (¶ 13).

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The Complaint seeks declaration that coverage is not owed for the alleged theft

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of the 14H Grader. It alleges HJPE breached a policy condition:
Mr. Johnson breached the Concealment, Misrepresentation or Fraud condition
by, among other things: (a) intentionally providing a false account of the
alleged purchase of a 14H Grader; (b) intentionally providing a false account
of the alleged occurrence of a theft of a 14H Grader from a jobsite in Whitman
County, Washington; (c) intentionally providing false information on HJPE’s
proof of loss.

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(ECF No. 1, ¶ 15). The Complaint also alleges coverage is precluded because of the

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lack of sufficient evidence of an ownership interest in a 14H Grader, as well as an

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inadequate explanation of what happened to it:
HJPE cannot meet its burden of proving (a) that it owned a 14H Grader; (b)

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the occurrence of a theft of a 14H Grader on or about September 4, 2015 from
its jobsite in Whitman County, Washington.

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(ECF No. 1, ¶16).
On July 15, 2016, HJPE responded with its Answer, Affirmative Defenses and

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Counterclaims. On August 4, 2016, HJPE filed the present Motion for Summary
Judgment. On September 1, 2016, the court entered its Scheduling Order. At the
time of the filing and Plaintiff’s response, Plaintiff had served but not reviewed
responses to discovery and no depositions had taken place.
HJPE seeks summary judgment in its favor on several affirmative defenses it

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asserts against CIC’s coverage defenses. HPJE makes four arguments. First, HJPE
contends that as a matter of law, the Inland Marine endorsement upon which CIC
relies does not apply to the Policy. Second, it contends CIC is “estopped” from

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asserting additional coverage defenses under the “mend the hold” doctrine

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(Affirmative Defense No. 5). Third, HJPE claims that if the Concealment,

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Misrepresentation or Fraud (“CMF”) provision applies, CIC was required to tender
back the premiums to HJPE (Affirmative Defense No. 2). Finally, HJPE claims CIC
has waived its right to enforce the CMF provision by extending an offer of coverage

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for the 12G Grader (Affirmative Defense No. 4). In response, CIC opposes the

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merits of the contentions and advocates for restraint on these issues until the

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resolution of threshold issues of coverage are addressed.
II.

STANDARD OF REVIEW

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In deciding motions under Federal Rule of Civil Procedure 56, the Court applies

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Anderson, Celotex, and their Ninth Circuit progeny. Anderson v. Liberty Lobby, Inc.,

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477 U.S. 242 (1986); Celotex Corp. v. Catrett, 477 U.S. 317 (1986). “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.

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Civ. P. 56(a). The moving party bears the initial burden of “informing the district

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court of the basis for its motion, and identifying those portions of the [record] which

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it believes demonstrate the absence of a genuine issue of material fact.” Celotex, 477
U.S. at 323. The burden then shifts to the nonmoving party to “go beyond the
pleadings” and “designate specific facts” in the record to show a trial is necessary to

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resolve genuine disputes of material fact. Id. The nonmoving party “must do more

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than simply show that there is some metaphysical doubt as to the material facts.”

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Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
Summary judgment is mandated if the non-moving party fails to make a showing
sufficient to establish the existence of an element which is essential to the non-

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moving party's case and upon which the non-moving party will bear the burden of

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proof at trial. See Celotex, 477 U.S. at 322.

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Generally, when a defendant moves for summary judgment on an affirmative
defense on which he bears the burden of proof at trial, he must come forward with
evidence which would entitle him to a directed verdict if the evidence went

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uncontroverted at trial. See Houghton v. South, 965 F.2d 1532, 1536 (9th Cir. 1992).

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“Only disputes over facts that might affect the outcome of the suit under the

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governing law will properly preclude the entry of summary judgment.” Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). For summary judgment purposes, an
issue must be both “material” and “genuine.” An issue is “material” if it affects the

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outcome of the litigation. An issue is “genuine” if it must be established by

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“sufficient evidence supporting the claimed factual dispute...to require a jury or

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judge to resolve the parties' differing versions of the truth at trial.” Hahn v. Sargent,
523 F.3d 461, 464 (1st Cir. 1975) (quoting First Nat. Bank v. Cities Serv. Co. Inc.,
391 U.S. 253, 289 (1968)); see also British Motor. Car Distrb. v. San Francisco

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Auto. Indus. Welfare Fund, 883 F.2d 371, 374 (9th Cir. 1989). “Where the record

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taken as a whole could not lead a rational trier of fact to find for the non-moving

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party, there is no genuine issue for trial.” Matsushita, 475 U.S. at 587 (citation
omitted).
In considering a motion for summary judgment, the court does not make findings

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of fact or determine the credibility of witnesses, Anderson, 477 U.S. at 255; rather,

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it must draw all inferences and view all evidence in the light most favorable to the

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nonmoving party. Matsushita, 475 U.S. at 587–88; Whitman v. Mineta, 541 F.3d
929, 931 (9th Cir. 2008).
III.

DISCUSSION

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A. Choice of Law, Burdens of Proof, and Judicial Restraint

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As a threshold matter, it is of consequence to point out that this court has subject

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matter jurisdiction based upon diversity of citizenship. There is no question that the
law of the forum state applies and, as such, the court will apply the law of
Washington in a manner as the Washington Supreme Court would apply it. Under

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Washington law, the interpretation of an insurance policy presents a question of law

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to be decided by the court. Moeller v. Farmers Ins. Co. of Wash., 173 Wash.2d 264,

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267 (2011). Generally, in Washington, contracts for insurance are subject to the
same rules of interpretation as are other contracts.
Analysis of a contract is a two-step process. The court first examines the policy

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provisions to determine if “the loss falls within the scope of the policy's covered

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losses.” Nw. Bedding Co. v. Nat'l Fire Ins. Co. of Hartford, 154 Wash.App. 787

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(Wash.Ct.App. 2010). If the party contesting the denial of coverage shows that the
loss is within the scope of covered losses, “[t]he insurer then must show that the
claim of loss is excluded.” Id.

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When, as here, the insurance company seeks only a declaration of non-liability

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and the insured asserts coverage under the policy and a counterclaim for money

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damages, the insured is in reality seeking recovery under the policy and the insurer
is denying the liability. See e.g., Am. Eagle Ins. Co. v. Thompson, 85 F.3d 327, 331
(8th Cir.1996) (“Stripped of its procedural posture, this action is, at base, a claim by

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Thompson [the insured who ultimately bore the burden] that he is covered under an

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insurance policy and a denial by the insurer [declaratory judgment plaintiff] that

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coverage properly exists.”). Even though the insurer has initiated this declaratory
judgment action and is the plaintiff, the court still adheres to the fundamental rule
that the burden of proof rests on the policyholder to establish its claim is within

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coverage of the policy, and once it has done so, the insurer bears the burden of proof

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of establishing that the claim is within an exclusion. See Queen City Farms, Inc. v.

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Central Nat. Ins. Co. of Omaha, 126 Wash.2d 50 (1994).
Defendant’s Motion for Summary Judgment focuses entirely on the second step
of the contract analysis – the exclusion of coverage. The parties agree, contested

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issues of fact exist in step one–whether a covered loss exists. CIC’s Complaint

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contends that HJPE cannot show that it owned a 14H Grader at the time of the

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claimed loss and under the insurance policy, it will not pay more than an amount
equal to the insured’s interest. (ECF No. 1, ¶16). Property insurance is a contract for
indemnity. As such, it entitles the insured to recover for actual loss and to the extent

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coverage anticipates an advantage or benefit to the insured, it is void against public

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policy.

RCW 48.18.040(1) provides that [n]o contract of insurance on

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property…shall be enforceable except for the benefit of persons have an insurable
interest in the things insured.” Pursuant to RCW 48.18.040(2), an “insurable
interest” is “any lawful and substantial economic interest in the safety or

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preservation of the subject of the insurance free from loss, destruction, or pecuniary

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damage.”

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This issue merits mention because a claimant’s burden of demonstrating an
insurable interest serves a significant and fundamental public policy underlying
insurance law which prevents insureds from using their coverage for illegitimate

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purposes. See Gossett v. Farmers Ins. Co. of Washington, 133 Wash.2d 954, 968

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(1997), reconsideration denied (“opportunities for net gain to an insured through

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receipt of insurance proceeds exceeding a loss should be regarded as inimical to the
public interest…”). Payment of insurance premiums on property does not give rise
to insurable interest where ownership of property belongs elsewhere. Gossett v.

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Farmers Ins. Co. of Washington, 133 Wash.2d 954 (1997), reconsideration denied.

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The court views much of Defendant’s Motion as asking the court to put the

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proverbial cart before the horse and decide the second step before the first. Put
another way, if HPJE cannot meet its burden of demonstrating that it had an insurable
interest against theft of a 14H grader, then the claimed illegitimacy of CIC’s defense

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based upon the Inland Marine endorsement is not relevant and needs no ruling from

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the court.

In resolving the Defendant’s Motion the court seeks not to delay

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disposition of the litigation nor offend the principle of judicial restraint.
B. Applicability of Inland Marine Endorsement
HJPE contends CIC’s request for declaratory judgment based on a provision

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contained within the Commercial Inland Marine Conditions Washington

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Endorsement, as alleged in ¶15 of the Complaint, fails as a matter of law and should

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be dismissed. HJPE asks this court to decide that the Inland Marine endorsement
does not apply to CIC Policy No. ENP 227281 providing coverage for Contractors’
Equipment (and Tools). In response, CIC argues that the Inland Marine endorsement

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(and its provisions) is unambiguously part of the policy.
Final resolution of the party’s policy arguments regarding CIC’s defense to

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coverage is premature, when questions of whether the policy even covers the 14H
Grader remain outstanding. Even assuming the policy applies to the claimed loss of
the 14H Grader and the applicability of the Inland Marine endorsement becomes

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relevant, the courts notes that the endorsement is repeatedly referenced throughout

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the policy: it is explicitly named in the list of applicable endorsements in the

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language of the Contractors Equipment (and Tools) Coverage part; and the
applicability (and

inapplicability) of specific provisions are discussed in the

Contractors’ Equipment (and Tools) Coverage Form Washington, both in Section B

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(Valuation) and Section C (“How Much We Pay”). (ECF No. 1, Ex. A at 23-24).

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The endorsement’s introductory language states it applies “in addition to the

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Common Policy Conditions,” which the parties seem to agree apply to the Policy.
See ECF No. 19 at 3(“For example, the Washington Common Policy Conditions
endorsement…unambiguously applies to all policies.”). Though HJPE contends an

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“average purchaser of inland marine coverage would expect the policy to cover risks

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inherent with land transportation of goods…” (ECF No. 9 at 4), in fact, the current

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concept of “inland marine” “is very broad, encompassing a range of specific risks
that is so wide…” 11 Couch on Ins. § 154:3. Property that can be insured under
inland marine contracts falls into categories, which can include “mobile equipment

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and property, such as a tractor, crane, or bulldozer while being moved from one

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location to another.” 11 Couch on Ins. § 154:3; see also Williston on Contracts

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§49:27 (stating the term inland marine is ‘broad” and citing case law describing it as
encompassing a “variety of specialized insurance coverage,” functioning “basically
as a form of property insurance…”).

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Whether and how the Inland Marine endorsement applies to this insurance policy

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is not an issue appropriate for resolution at this time. The court declines Defendant’s

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requested dismissal of CIC’s declaratory judgment action or any of CIC’s coverage
defenses based upon the alleged inapplicability of the Inland Marine endorsement.
C. Estoppel Under the Mend the Hold Doctrine

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HJPE asks the court to estop CIC from denying coverage based upon any other

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reason than the Concealment, Misrepresentation or Fraud provision contained in the

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Inland Marine endorsement. It relies upon the “mend the hold” doctrine, which
prevents an insurance company from denying coverage on one basis and then
asserting new and different grounds for its denial when the original ground is

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challenged or fails. Karpenski v. Am. Gen. Life Cos., 999 F.Supp.2d 1235, 1245

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(W.D.Wash.2014) (citing Washington and federal common law and holding the

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doctrine prevents an “insurer from changing the basis for avoiding liability after the
onset of litigation.”).

The mend the hold doctrine in Washington, requires the

insured to demonstrate that it either suffered prejudice as a result of the insurer's

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failure to raise sooner a ground for denying coverage or that the insurer acted in bad

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faith when it failed to raise that ground sooner. Id. (citing Hayden v. Mut. of

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Enumclaw Ins. Co., 141 Wash.2d 55 (Wash. 2000)); see also, Ryerson Inc. v.
Federal Ins. Co., 676 F.3d 610, 614 (7th Cir.2012) (“When there is no prejudice to
the opposing party, invoking the doctrine of mend the hold to bar a valid defense is

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overkill.”).
HJPE has not demonstrated unfair surprise and cannot persuasively argue that the

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defense of lack of insurable interest is an “entirely new defense.” (ECF No. 19 at 7).
CIC’s declination letter sets forth a number of policy provisions (including the
insurable interest provision) and grounds sufficient to preserve its right to articulate

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additional bases for the denial of coverage. See ECF No. 11 (Sheldon Aff.), Ex. A

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at 4-5, 13-14. Ultimately the denial letter concludes that the CIC is denying coverage

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because there “is no evidence HJPE owned a 14H grader at the time of loss.” Id.
CIC’s Declaratory Judgment Complaint is consistent with its declination letter. The
money, time and effort spent responding to CIC’s requests during its 9-month period

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of investigation is insufficient to justify application of the equitable mend the hold

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doctrine.

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D. Return of Premiums Paid
HJPE’s Motion also contends that 1) if the Concealment, Misrepresentation and
Fraud provision applies, then under HJPE’s interpretation of the language of the

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policy, CIC must void the entire policy (not deny coverage); and 2) CIC is

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“precluded from voiding the policy” because it has failed to tender back HJPE’s

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premium. Again, this argument places the cart before the horse. Whether the CMF
provision even applies, if it does, when the alleged concealment occurred (at contract
formation or during loss reporting), and the appropriate remedy are all questions that

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cannot be determined on the present record.
E. Waiver

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Finally, HJPE contends CIC waived its defense based upon the CMF provision
because “with full knowledge of the purported misrepresentations,” it nevertheless
“attempted to settle a claim” for the 12G Grader in March 2016. (ECF No. 19 at 8).

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CIC contends it made a good faith offer to provide coverage for a grader it confirmed

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was on the job site and owned by HPJE; however, it did not confirm HJPE was still

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in possession of the 12G grader until after the offer. Defendant’s waiver argument
is rejected. An insurer cannot waive policy coverage issues when a policy does not
provide coverage. See Transamerica Ins. Group v. Chubb & Son, Inc., 16 Wn.App.

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247, 253, (1976) (holding that an insurer could not waive the right to deny coverage

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if there was no coverage to deny). CIC could not have waived its right to deny

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coverage for the 14H grader, if its policy does not cover the 14H grader, which is an
outstanding question not before the court today.
IV.

CONCLUSION

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Defendant’s Motion for Summary Judgment (ECF No. 9) is DENIED.

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DATED this 24th day of October, 2016.

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s/Lonny R. Suko
________________________________
LONNY R. SUKO
Senior U.S. District Court Judge

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