Summary: A Painless Steel customer was injured due to a body piercing. The co-owners of Painless Steel had foregone the expense of insuring it so the commercial liability insurer for one of the individual owners had no duty to defend or indemnify the LLC and had no bad faith exposure.
Lacey Filosa went to Painless Steel and had her tongue pierced. Unfortunately, an infection developed involving a “flesh eating” bacteria. Filosa recovered from the infection, but suffered significant scarring. She filed suit in state court against Painless Steel and its two owners, Mr. and Mrs. Burns, and then settled. After the underlying suit settled, a coverage action was filed in which the underlying plaintiff and the named insured sought coverage declarations, as well as bad faith recoveries.
Scottsdale Insurance insured Mr. Burns as an individual on a policy which provided commercial general liability and commercial property coverage for his property rental business. The policy’s description of “Who Is An Insured” did not seem to provide coverage for Painless Steel-Everett LLC and contained a professional service exclusion, as well as an exclusion “related to fungi or bacteria.”
After the underlying bodily injury suit was filed against Painless Steel, defense of the suit was tendered to Scottsdale. Over the course of that case, Scottsdale declined coverage on four different occasions. Scottsdale pointed out that Painless Steel was not its insured. Filosa’s attorney’s creative pleading efforts included naming the Burnses individually while specifically alleging that there was “no liability insurance coverage for [Painless Steel],” but named the Burnses “in their capacity as the sole owners of Painless Steel.” In each denial Scottsdale pointed out that the litigation was not directed against its “named insured in the declarations.”
The district court concluded that the policy of insurance Scottsdale issued to Mr. Burns as an individual was not vague or ambiguous. The policy made it clear that he was covered for his negligent conduct. No allegation was directed against him as the sole owner of Painless Steel or otherwise in his individual capacity. The attempt by plaintiff’s counsel to overcome the coverage issue by naming both Mr. and Mrs. Burns as the “sole owners” of Painless Steel did them no good because the coverage agreement clearly stated, after identifying who was covered, that “no person or organization is an insured with respect to the conduct of any current or past partnership, joint venture or limited liability company that is not shown as a named insured in the declaration.” (Emphasis added.) The court concluded that that statement was clear and unambiguous and that all proposed readings by the plaintiff were “tortured.” Furthermore, the court rejected the attempts to overcome the LLC exclusion.
The “artful pleading” by Filosa’s attorney in the underlying case undid her in the coverage action in federal court. Although he specifically named both Mr. and Mrs. Burns in the underlying case, he clearly stated, as well, that Filosa was not suing them “as individuals subject to personal liability.” The district court found that to be a binding representation and judicially estopped her from changing her position in the coverage case. The court also noted that although it was unnecessary to do so, it looked to extrinsic evidence which supported its conclusion that the policy provided no coverage and, therefore, there was no duty to defend Painless Steel or the individuals owning it because it was obviously the intention of Mr. Burns “to leave [Painless Steel] bare of insurance.” Furthermore, the professional services exclusion was triggered and barred coverage even if Painless Steel was an insured. That exclusion combined with the failure by Burns to pay any premium amount for “professional liability” coverage, as well as his deposition testimony that he did not insure Painless Steel because there was “pretty much nothing that would cover [them] on a professional standing that [they] could afford.” Because the court found that the policy did not provide coverage and that the professional services exclusion applied as well, it did not address Scottsdale’s argument that the “bacteria exclusion” applied as well. The court ruled that “Scottsdale correctly determined that no coverage applied and it had no duty to defend.”
After finding that the policy provided no liability coverage, the court quickly disposed of the bad faith/CPA claims. The court first noted that the claims were atypical. The court noted that the plaintiff in the Burns case was contending that Scottsdale had “acted in bad faith by refusing to defend Mr. Burns ‘based on an arguable, self serving interpretation of its policy that put its interests ahead of its insured.’” The Court noted that the bad faith contention was “premised on the same arguments” as the coverage arguments, so they had to fail “for the same reasons.” In addition, “plaintiff’s contention that defendant violated the CPA by acting without reasonable justification is fatally undermined because defendant acted consistently with the policy.” In making that ruling, the court cited with favor an earlier Washington Court of Appeals opinion which ruled that an insurance company’s “reasonable basis for denial” serves as a “complete defense to any claim that the insurer acted in bad faith or in violation of the Consumer Protection Act.” Pointing to the Washington State Insurance Regulations governing claims handling, the court noted that none of those regulations “require [ ] insurance claims adjusters to be conversant with the names of specific cases or to review such cases prior to making coverage determinations.” Having reviewed the deposition testimony, the court noted that Scottsdale and its claims personnel “understood its legal obligations, including those related to the duty to defend.” For those reasons, the court ruled that plaintiff’s bad faith and CPA violation claim “fails as a matter of law.”
The 9th Circuit affirmed that ruling in a two paragraph unpublished memorandum opinion which briefly stated the facts, including the critical fact that the owner of Painless Steel “chose to leave Painless Steel uninsured.” After noting that the district court had ruled against any coverage “in a carefully reasoned decision,” the 9th Circuit agreed that there was no possibility of coverage and, therefore, no duty to defend “for the reasons given by the district court.”
The Burns case fairly clearly demonstrates that whenever the named insured is an individual who also is a co-owner of a corporation, an LLC, or similar entity, which is not a named insured on either the declarations page or an endorsement, and the named insured testifies that he did not insure the business which caused the injury because he could not afford such liability coverage, it is virtually impossible for an injured party to take an assignment and successfully convince the court to find coverage. Where there is no coverage in the first instance, in most jurisdictions it is virtually impossible for an injured plaintiff to convince a court that the insurance carrier which denied coverage acted in bad faith.
The district court and 9th Circuit rulings were brought to our attention by Mr. Geoff Bridgman of Ogden Murphy Wallace PLLC in Seattle, Washington. I want to thank Mr. Bridgman for bringing this interesting case to our attention. If you have a bad faith case you would like us to discuss, please send it to the attention of your favorite blogger.
