Lessons Insurance Companies Refuse to Learn

When you tell people — lawyers included — that you love insurance law, they’re apt to look at you as though you just dropped trou, squatted and took a massive, steaming, noisy, extraordinarily malodorous dump on the floor.

Why insurance law? Here’s one reason.

Once upon a time there was a dental technician and Seattle, Washington resident named Tina Alberts. Tina loved pot-bellied pigs. Her family regularly took in and cared for abandoned pigs, and Ms. Alberts even kept one of her own as a pet. Such was her love for pot-bellied pigs that she spoke of them often at work.

Ms. Alberts’ boss, Robert Woo, D.D.S., was zany, madcap kind of guy who liked to keep things light and cheery in the workplace. To that end, he regularly regaled Tina with graphic stories and photos of his successful boar hunting trips, and predicted a similarly grisly fate for Walter, Tina’s pet pig.

Tina had two baby teeth that never fell out and never got replaced by adult teeth. Dr. Woo agreed to remove the baby teeth and replace them with permanent implants. The procedure involved extracting the baby teeth and inserting temporary false teeth.

Fun-loving guy that he was, Dr. Woo just couldn’t resist the urge to play a little practical joke. With Tina completely anesthetized, the good doctor inserted into her mouth two fake boar’s tusks that he had made specially for the occasion. He then took photos of the unconscious, boar-toothed Tina with her eyes and mouth pried open. Having had his fun, Dr. Woo removed the boar’s teeth and finished the procedure.

A month or so later the folks at the office celebrated Ms. Alberts’ birthday by showing her the zany photos. After assisting on one last dental surgery, Tina left the office never to return.

Not long thereafter Dr. Woo got served with lawsuit papers. Tina was suing him, asserting in her complaint causes of action for professional negligence, intentional and negligent infliction of emotional distress, various invasion-of-privacy torts, and battery.

This is where the insurance part comes in. Dr. Woo had a policy with Firemans Fund Insurance Company that provided professional liability, employment practices liability and general liability coverage.

Liability insurance policies generally afford two types of benefits. First, the insurer has a duty to indemnify, i.e., pay any amount (up to the coverage limit of the policy) that the insured is legally liable to pay for a covered loss. Second, the insurer has a duty to defend. In the event of a lawsuit, the insurance company must hire a lawyer for the insured, pay the attorney fees and pay the other costs and expenses of litigation.

Deciding whether an insurance company has a duty defend involves applying what’s often called the “eight corners” rule. You look to the four corners of the complaint plus the four corners of the insurance policy. Where the allegations in the complaint, if true, would impose liability that the policy even conceivably covers, the insurance company has to provide a defense. That’s true even if it’s ultimately determined that the policy provides no coverage.

The smart thing for an insurance company to do in cases involving questionable coverage is provide a defense with a reservation of rights. That essentially says, “We’re paying your defense costs, but not admitting that coverage exists. We reserve the right to refuse to indemnify you down the road, and further reserve the right to collect back from you the money we’re currently spending on your defense if it’s determined that no coverage existed.” The insurance company can also commence litigation of its own requesting a judicial decision on whether or not the claim is covered.

Firemans Fund ain’t smart, or at least wasn’t smart in this case. Dr. Woo took Tina’s complaint to his insurer and requested the defense and indemnity his policy provided. Firemans Fund’s response: “Go piss up a rope.”

Many a case would have ended right then and there. Trying to collect on a judgment against an uninsured tortfeasor is usually an expensive, time consuming and largely fruitless business. For that reason, lots of plaintiffs’ lawyers can’t be bothered with cases where the defendant has no insurance or the insurance company is denying coverage.

This case was different. Dr. Woo apparently had quite the successful practice, and so had plenty of money from which to collect a judgment and pay his own defense counsel. Tina’s case proceeded.

Shortly before trial Dr. Woo settled the lawsuit for $250,000. Smart move. Fucking around with an anesthetized patient is pretty goddamn heinous, jovial intent notwithstanding. Don’t no defendant want a jury getting its hands on a case like that.

Dr. Woo then turned around and sued Firemens Fund. His complaint alleged breach of the contractual duty to defend, the tort of bad faith, and violations of Washington’s Consumer Protection Act (“CPA”). The trial judge ruled as a matter of law that Firemans Fund breached the insurance contract by refusing to pay for Dr. Woo’s defense. A jury slam-dunked Firemans Fund thoroughly. By the time all was said and done, FF was on the hook for the $250,000 that Dr. Woo paid out of pocket to settle Ms. Albert’s lawsuit, plus $750,000 in compensatory damages on top of that. Thanks to the jury’s finding that FF violated the CPA, the insurance company had to pay all of Woo’s attorney fees as well.

Firemans Fund appealed. The intermediate appellate court ruled that the trial court erred on the duty-to-defend issue and remanded the case with instructions to dismiss the whole lawsuit.

In a 5-4 decision issued on July 26, 2007, the Washington Supreme Court reversed the court of appeals and reinstated the trial court’s judgment. The majority opinion is here, and the dissents are here and here.

There’s plenty of room for debate about whether the majority or the dissenters were right on the duty-to-defend issue. That’s not the point.

Beyond considerations of “correctness,” the second dissent brings up an excellent point about just how icky this outcome feels:

Today’s majority decision rewards Dr. Woo’s obnoxious behavior and allows him to profit handsomely. . . .

. . .

The insurance company must pay Dr. Woo $750,000 in damages, additional attorney fees, and also reimburse the $250,000 that Dr. Woo paid to the real victim. In total, Dr. Woo (and his attorneys) will receive a million dollars more than the amount that his traumatized ex-employee was compensated for this cruel “joke.”

Woo engages in some truly hideous behavior and walks away richer than ever before. Deciding who you want to win a case such as this is akin to deciding who you like more, Hitler or Stalin. But that’s not the point, either.

Placing aside the perfectly legitimate concerns referenced above, this case is an outstanding example to cite the next time some douchebag starts yammering on about how the civil justice system leads to out-of-control liability insurance premiums. I’d love to say this is an isolated case, but liability insurers roll the proverbial dice on duty-to-defend cases pretty regularly, despite the heavily pro-insured rules governing that duty.

In this case, Firemans Fund will end up spending way over a million bucks to save the $50,000 or so it would have spent on defending Dr. Woo with a reservation of rights in Tina’s lawsuit. That gargantuan loss has shit-all to do with the tort system. It’s the direct and proximate result of the insurer’s petty and ill-considered greed. That, dear reader, is the point.