Insurer Must Defend Utility in Suit Based on Outage, Despite Exclusion for Property Damage and Resulting Loss of Use

A Washington federal district court, applying Washington law, has held that an insurer who issued a public officials and employment practices liability policy to a utility had a duty to defend the insured in an action stemming from damages to a refinery after a power outage, despite the policy’s property damage exclusion.  Indian Harbor Ins. Co. v. City of Tacoma, Wash. Dep’t of Pub. Util., 2018 WL 6304767 (W.D. Wash. Dec. 3, 2018).  The court found that the underlying complaint was ambiguous as to whether the refinery sought any damages other than those for property damage.

A refining company sued the insured utility following a power outage that caused an unanticipated total shutdown of the refinery’s operations and alleged that heavy flaring and equipment damage occurred once the refinery lost power.  The refinery also alleged that the outage impacted its production yields and generally alleged that unscheduled shutdowns may damage its commercial obligations and profitability.  The utility’s insurer agreed to defend under a reservation of rights, and sought a declaratory judgment that it had no duty to defend based on the policy’s exclusion for damages based upon or arising out of physical injury to tangible property, including all resulting loss of use of that property and loss of use of tangible property that is not physically injured.

The court held that, based on the plain language of the policy, the exclusion applied to damages the refining company sought related to physical injury to property and loss of use of property; however, it was not clear whether the underlying complaint sought other damages.  Because under Washington law the complaint must be construed liberally in favor of the insured, the court held that the insurer had a duty to defend and entered summary judgment in favor of the insured on that basis. The court concluded that it was premature to consider the duty to indemnify.

The insurer also moved for summary judgment on the utility’s counterclaim for the tort of bad faith, arguing that it did not commit bad faith by agreeing to provide a defense while at the same time filing a declaratory relief action.  The utility argued that its counterclaim was based on the fact that the declaratory judgment action might prejudice its tort defense.  The court rejected this argument, finding that the utility failed to point to any evidence that the insurer sought adjudication of factual matters disputed in the underlying litigation.  The court therefore dismissed the bad faith counterclaim.