The Washington Supreme Court recently decided Robbins v. Mason County Title Insurance, a case involving the insurer’s duty to defend. In that case, the court held Mason County Title Insurance (MCTI) breached its duty to defend and the breach was unreasonable as a matter of law.
By way of background, the duty to defend is the part of the policy when the insurance company promises to pay for or provide a lawyer to defend a claim made against you. The duty to defend is contained in all different kinds of liability insurance policies, including automobile, homeowners, commercial liability, and professional malpractice or errors and omissions policies. It is an incredibly valuable and important part of every policy because most can’t afford to pay a lawyer over the course of a lawsuit.
In this case, the Robbins owned property that included tidelands with manila clam beds. A Native American tribe informed them that it intended to harvest shellfish from their property pursuant to an 1854 treaty previously recognized by the courts.
When the Robbins purchased the property in 1978 they obtained a title insurance policy from Mason County Title (MCTI). The policy promised to insure the Robbins against loss or damage due to any defect in, or encumbrance on, the property that existed as of 1978.
There was an exclusion for "public or private easements not disclosed by the public record." Public records were defined as records that "impart constructive notice with respect to said real estate."
In 2015 the tribe sent notice to the Robbins that it intended to enter their property and harvest clams. It wasn't clear the tribe had the right to harvest shellfish from the Robbins' property. The treaty granted the tribe the right to harvest shellfish from all naturally-occurring shellfish beds, but not man-made ones. It wasn't clear which category the clam beds on the Robbins' property fell into. The Robbins turned the letter over to MCTI and asked for a defense.
MCTI denied the request for a defense. It claimed the treaty right to harvest shellfish was an easement and the treaty was not a record that imparts constructive notice. So MCTI argued the treaty rights did not fall within the scope of the policy.
The Robbins sued MCTI, and we're off and running. The first issue the court looked at was whether MCTI breached its duty to defend Robbins. It held MCTI did have a duty to defend because the policy conceivably covered the tribe's asserted right.
As mentioned above, the duty to defend is one of the important promises contained in a policy. The other is the duty to indemnify or pay any damages you legally caused. Those two rights are different and are not judged by the same standards.
There is a long line of cases, holding the duty to defend is broader than the duty to indemnify. The duty to indemnify exists if the policy actually covers the loss, whereas the duty to defends arises if the policy conceivably covers the loss. Actually vs. conceivably is key.
Under the duty to defend, an insurer is relieved of its duty only if the policy clearly does not cover the claim. If there is any ambiguity, then that ambiguity is construed in favor of the the policyholder and triggers the insurer's duty to defend.
The insurer argued first that its duty to defend was not triggered because there was no lawsuit actually filed. The court rejected that argument because the policy language says it will "defend the insured with respect to all demands and legal proceedings."
In other words, the policy covered more than just lawsuits. It also covered "demands." The plain, ordinary meaning of the word "demand" includes the assertion of a legal right, which the court held was what the tribe was doing in its letter.
MCTI cited Washington case law that supported its contention that the duty cannot arise before a legal proceeding is initiated. However, the court noted those cases arose in different contexts with different kinds of insurance.
Most standard auto policies, for example, do contain the requirement that the duty to defend is triggered only after the filing of a lawsuit.
However, the cases cited by MCTI did not contain the actual language of the policy covering the duty to defend, so the comparison wasn't necessarily appropriate.
The court also pointed to a Court of Appeals case that held the duty to defend was triggered before a lawsuit because the policy language said the insurer would defend when suit was brought but also when any claim was made for damages.
In other words, the outcome depends on the scope of the duty as drafted by the insurer.
The court then went on to hold no exception to coverage applied because it was legally uncertain whether a treaty right was an easement or something else.
The court then performed a bit of a deep dive into the nature of a treaty right under property law, citing a 1905 US Supreme Court case in which the court held fishing rights reserved to a tribe "imposed a servitude upon every piece of land" that it impacts. A servitude creates a right or obligation that runs with the land and can include things like an easement, a profit, or a covenant.
The court held the tribe's treaty right here was a profit because it involves the right to sever and remove something from the land. The right to cut timber is a profit, and harvesting clams is just like that. However, a profit could still be considered a type of easement and fall within the exclusion.
The court reviewed authorities that considered profits as an easements. However, the more recent trend in this state was to recognize a profit as a "cousin of easements" meaning it's something different than an easement. The court cited a Washington treatise on property law that discusses profits and easements and the distinctions between them becoming blurred.
The court concluded: "While logically one who holds a profit must also hold an easement to enter the land to reach the subject of the profit, it is unclear under Washington law whether a profit is a different type easement or a distinct servitude altogether."
As noted above, uncertainty in the law must always be construed in favor of triggering the duty to defend. So while the court declined to decide the issue, it didn't have to. The existence of the ambiguity meant the insurer had a duty to defend.
The court then turned to the next issue and MCTI's breach of the duty to defend was bad faith as a matter of law. There is a long line of cases where the court has held that failing to defend in the face of a legal ambiguity is bad faith as a matter of law.
Insurers are simply not allowed to cherry pick the authority that supports its argument and ignore authority that favors the policyholder. In those circumstances, the insurer must defend under a reservation of rights and ask a court to determine its duties. This protects the rights of both the insured and the insurer, and doesn't leave the insured out to dry like a complete denial of the duty to defend does.
Three justices dissented on various grounds and would've held there was no breach of the duty to defend.
A few final thoughts. If there's ANY question about coverage, insurers just need to defend. I don't know if Washington is more explicit about this rule than other states, but this has been the downfall of many insurer here.
Why is this rule so important? The remedy for a breach of the duty to defend in bad faith is coverage by estoppel. All coverage defenses are gone. Even if there wasn't coverage, there is now. The insurer is on the hook for claim without respect to any insurance limits.
It's harsh, but it's purpose is to encourage insurers to act properly because of the crazy imbalance of power that almost always exists between the insurer and the policyholder. With one decision not to defend, the insurer can cause huge financial hardship and bankruptcy. To balance out the potential catastrophic financial harm insurers can cause to their insureds by not defending, the remedy imposed has to be serious enough to force the insurers to think twice about not defending. Coverage by estoppel is how the Washington courts have chosen to do encourage insurers to act properly.