In 2FL Enterprises, LLC v. Houston Specialty Insurance Company, the United States District Court for the Western District of Washington examined whether insurer Houston breached its duty to defend and whether that breach constituted bad faith.

On April 20, 2016, MCS filed suit against 2FL (a construction company) alleging construction defect claims related to improvements 2FL performed on MCS’ Williams Court Apartments.  2FL, covered by multiple policies, tendered the suit to Houston.  While Houston acknowledged the tender, it did nothing else.  On May 17, 2016, MSC was granted an order of default (a judgment of default was later entered).  On September 23, 2016, Houston denied coverage and defense.   2FL then tendered defense to another insurer, Hannover.  Hannover accepted the tender, at which point Houston attempted to join in the defense, but its offer was rejected.  Hannover-retained counsel was successful is having the default set aside and the case proceeded with Hannover providing the defense to 2FL.

2FL sued Houston based on its coverage denial and moved for partial summary judgment that Houston had a duty to defend and that its failure to defend constituted bad faith.  Both motions were granted.   The Court found that Houston had improperly relied on extrinsic evidence to conclude (incorrectly) that Williams Court was a condominium (the policy had an exclusion for condominiums).   Washington law does not permit insurers to use extrinsic evidence when determining their duty to defend.  The Court held that Houston made its decision to decline a defense based on a legal conclusion that was violation of Washington law and it therefore breached its contractual duty to its insured.  The Court also found this breach constituted actionable bad faith.  Houston declined to defend based on a decision which was unreasonable and unsupported.  The Court found the 2FL met its burden of showing real harm because although the default judgment was ultimately vacated, Houston’s denial caused lengthy delay resulting in financial burden and time expenditure.

Link to opinion.