Johnson v. Safeco—Fraud Voids an Insured’s Extra-Contractual, CPA, and IFCA Claims Even If the Insurer Committed its Alleged Wrongs Before the Insured’s Wrongful Conduct
June 14th, 2014
In Johnson v. Safeco Insurance Company of America, 176 Wn. App. 1022 (2013), the Washington Court of Appeals upheld the trial court’s Summary Judgment dismissal of the insured homeowner’s claim for property coverage, bad faith, and alleged violations of the Consumer Protection Act (CPA) and Insurance Fair Conduct Act (IFCA) because the insured fraudulently misrepresented facts during the claim process and untruthfully inflated the value of his claim. Although decided in December 2013, the Appellate Court recently granted a Motion to Publish the holding. In Johnson, the Court of Appeals clarified the Supreme Court of Washington’s holding in Mutual of Enumclaw v. Cox, 110 Wn.2d 643, 757 P.2d 499 (1988), which held an insured’s fraud voids the coverages that would have otherwise been available under the insurance contract and equitably estops the insured from asserting CPA violations (note: Cox was decided before IFCA existed). Johnson expanded upon Cox because it held an insured’s fraud is fatal to its extra-contractual, CPA, and IFCA claims even if the insurer allegedly committed bad faith or violated the CPA and IFCA before the insured committed fraud. In other words, fraud by the insured at any time during an open claim results in forfeiture of both the insured’s contractual and extra-contractual claims.
The insured, Mr. Johnson, carried homeowners’ insurance with Safeco, which sent a Renewal Notice to Mr. Johnson’s mortgage company, Taylor Bean & Whitaker Mortgage Corp. (TBW), requiring payment of premium by a date certain to renew coverage and ensure the mortgage company’s interests were also insured. TBW failed to pay the premium. When Safeco sent TBW a Notice of Cancellation with a date certain for policy cancellation absent payment of premium, TBW still didn’t pay. Instead, TBW secured a “lender placed” policy with another carrier, Mount Vernon Fire Insurance Company (Mount Vernon). Ultimately, Safeco and Mount Vernon came to an agreement as to what percentage of Mr. Johnson’s fire loss claim each company would pay. But neither company paid the full amount Mr. Johnson sought for structural repairs, personal property damage, or Additional Living Expenses (ALE) while displaced from his home. The main component of the ALE claim was Mr. Johnson’s allegation that he had to move into a separate rental property he owned and thus could not rent that property out to others. He claimed the “lost rents” as part of his ALE.
Mr. Johnson filed suit against Safeco, Mount Vernon, and TBW, seeking full coverage for the fire loss, alleging bad faith, and asserting violations of Washington’s CPA and IFCA. Safeco prevailed on its Motion for Summary Judgment and secured dismissal, arguing it was not on the risk at the time of loss due to TBW’s failure to renew the Safeco policy. Mount Vernon continued to defend itself in the lawsuit alone, after Safeco secured dismissal and TBW was discharged from the lawsuit due to its having filed for bankruptcy protection.
As part of its defense of the lawsuit, Mount Vernon took Mr. Johnson’s deposition, where he testified about the alleged lost rents. He also produced a previous lease to show the rent he used to collect for the portion of his rental duplex he was now living in while his home was being repaired. He later admitted he had forged the lease, but attempted to justify the forgery by claiming the lease he drafted accurately reflected the oral agreement he had reached with his former tenants.
Mount Vernon then filed an Amended Complaint asserting misrepresentation and fraud as affirmative defenses and moved for Summary Judgment Dismissal on those bases. In support of its motion, Mount Vernon presented testimony from the former tenants, who stated they only paid Mr. Johnson $750 a month and never signed a lease. Relying both on Washington case law and the terms of the Mount Vernon policy, the trial court dismissed Mr. Johnson’s claims against Mount Vernon with prejudice.
Mr. Johnson appealed the Summary Judgment dismissals of his bad faith, CPA, and IFCA claims against both Safeco and Mount Vernon. He did not dispute the dismissal of his coverage claims under either insurance policy, as the holding in Cox is clear that an insured who commits fraud in an effort to deceive its insurer loses the protections of the insurance policy. Though Mr. Johnson did not offer evidence to dispute his fraudulent conduct, he argued his fraud did not void his right to assert extra-contractual, CPA, and IFCA claims because his fraudulent conduct occurred after Mount Vernon had already allegedly committed the first wrong my acting in bad faith and in violation of the CPA and IFCA.
The Court of Appeals in Johnson affirmed the Summary Judgment dismissal of Mr. Johnson’s claims against both Safeco and Mount Vernon. Safeco’s dismissal was deemed appropriate because the failure to pay premiums resulted in lapsed coverage. More importantly, Mount Vernon’s dismissal was deemed appropriate because the Court found it was immaterial that Mr. Johnson’s fraudulent conduct allegedly occurred after Mount Vernon had allegedly acted in bad faith or in violation of the CPA and IFCA. In other words, Johnson makes clear that fraud at any time during an open insurance claim costs an insured both its contractual coverage claims and its extra-contractual and statutory claims. And this is so even if the insured’s fraud allegedly occurred after its insurer had allegedly already acted in bad faith or in violation of insurance statutes.