Insurer Did Not Breach Duty to Defend Where it Refused to Defend Insured’s Husband and Marital Community

The United States District Court for the Western District of Washington, applying Washington law, has held that insurers did not breach their duty to defend where they refused to provide a defense for an insured’s husband and marital community.  Staheli v. Chicago Ins. Co., 2016 WL 2930444 (W.D. Wash. May 19, 2016).  The court also held that the insurers could not be liable for bad faith or for violations of the Insurer Fair Conduct Act or Consumer Protection Act.

Two insurers issued professional liability policies covering an individual’s psychology practice.  The policies identified the individual as the Named Insured in her capacity as the sole proprietor of her practice.  Both policies provided that the insurers had a duty to defend “any Suit against the Insured seeking Damages.”  The insured, her husband, and their marital community were sued for alleged harm arising out of the insured’s treatment of a patient.  The only allegation against the insured’s husband was that he was married to the policyholder.  The insurers defended the insured and settled the underlying action.  However, the insurers denied coverage for the insured’s husband and their marital community.

In the ensuing coverage litigation, the court granted the insurers’ motion to dismiss because neither the insured’s husband nor the marital community were insureds under the professional liability policies.  The court noted that an insurer has a duty to defend any claims against an insured that could conceivably be covered under insurance policies but that the duty to defend did not extend to “any party who could conceivably have been covered by its insurance policy.”  In addition, the court concluded that it was irrelevant that the insured’s husband or the marital community could have ultimately been liable for the insured’s activities under Washington marital community property law because the policies only required the insurers to provide coverage for “all sums which the Insured became legally obligated to pay.”  The court also rejected the argument that the insured’s husband and the marital community were third-party beneficiaries of the policies, reasoning that the contracting parties did not objectively intend that there be any third-party beneficiaries.

The court also rejected the insured’s claims of breach of contract and breach of duty to defend because the insurers provided a defense to her and settled the underlying action.

Finally, given the lack of unreasonable conduct by the insurers, the court dismissed the claims for bad faith and violations of the Insurer Fair Conduct Act and Consumer Protection Act.