Coverage Too Narrow

In PCIC v. Baker and Son Construction, 514 P.3d 1230 (2022), Washington’s Supreme Court was asked to determine whether a claims-made policy—which required a loss to occur and be reported within the same policy year, and excluded prospective and retroactive coverage—violated Washington public policy. The court ruled in the affirmative, holding that the policy was overly restrictive and in violation of the public policy as set forth in Washington’s contractor registration statute, and therefore unenforceable.

General contractor Cox Construction hired Baker and Sons as a subcontractor on a remodeling project in Long Beach, Washington. On Oct. 31, 2019, a Baker employee allegedly caused a two-by-four to fall from a railing and it struck Cox owner Ronnie Cox in the head. Cox died in his sleep later that night. Baker called its insurance agent to alert them of the accident. The agent told Baker no action was necessary because no claim had been filed

Almost a year after the accident, in September 2020, Baker was notified that Cox’s widow was pursuing a wrongful death claim against Baker. Baker notified its insurer, Preferred Contractors Insurance Company (PCIC), of the claim on Sept. 25, 2020. PCIC issued CGL policies to Baker in 2019 and 2020, both with January expiration dates. Both policies contained occurrence language similar to an occurrence policy, but “claims-made and reported” language was added by endorsement. The policies issued were non-retroactive, limiting coverage under each to one year. PCIC denied coverage because the occurrence and reporting dates did not occur in the same policy period, yet the carrier agreed to defend Baker under a reservation of rights. 

After Cox’s widow filed a wrongful death action, PCIC filed a declaratory action in U.S. District Court for the Western District of Washington seeking a declaration that it had no duty to defend or indemnify Baker for Cox’s death. The district court denied PCIC’s motion for summary judgment and issued the following certified question to the Washington Supreme Court:

“When a contractor’s liability insurance policy provides only coverage for ‘occurrences’ and resulting ‘claims-made and reported’ that take place within the same one-year policy period, and provide no prospective or retroactive coverage, do these requirements together violate Washington public policy and render either the ‘occurrence’ or ‘claims-made and reported’ provisions unenforceable?”

The court reaffirmed the well-established principle that insurance policies are private contracts that allow the parties to exercise their freedom of contract to limit the liability covered in the policy. Here, Baker had applied for a claims-made policy. Importantly, however, the court noted that policy terms contrary to public policy will not be enforced.  
The court went on to analyze the policies under Washington’s contractor licensing and registration statute, which requires contractors to maintain insurance for the protection of the public. Specifically, RCW 18.27.050(1) requires contractors to carry insurance or financial responsibility to cover $100,000 for injury or damage, including death, suffered by members of the public because of the contractor’s negligence. The court found the statute established a public policy threshold upon which to evaluate PCIC’s coverage position.

In considering whether the PCIC policies violated public policy, the court noted that both reset the retroactive date of coverage to the start of each new policy period such that there was no continuous or retroactive coverage between policies. Read together, the occurrence language and the endorsements unambiguously meant coverage was limited to losses that occurred and were reported to PCIC within the applicable one-year policy period.

PCIC argued that because Cox’s death occurred in October 2019 and his widow did not notify Baker of her intent to sue until September 2020, the occurrence and reporting dates did not occur in the same policy period. Thus, the 2019 policy did not cover the claim because it was not reported within the policy period, and the 2020 policy did not provide coverage because the occurrence giving rise to the claim happened before the policy period began on Jan. 5, 2020.

While noting that claims-made policies do not generally violate public policy, the PCIC policies were atypical in not providing retroactive coverage, and, in light of the statutory mandate that requires contractors to maintain insurance to protect members of the public, the court found the restrictive coverage to be so narrow so as to render it illusory and therefore in violation of public policy. 

The certified question before the court was one of first impression, and the holding is important. A CGL policy issued to a Washington contractor for licensing purposes that requires the loss to occur and be reported to the insurer in the same policy year and fails to provide prospective or retroactive coverage is unenforceable. Whether lawmakers in Olympia will take notice of the court’s observation that RCW 18.27.050 does not mandate issuance of occurrence policies or provide retroactive coverage to contractors who buy an occurrence policy after their claims made policy expires, is anyone’s guess. Regardless, the holding makes clear that Washington courts will rely on broad public policy rationale to find coverage for contractors.