Leon CAPELOUTO, a single man, and Capelouto Enterprises, Inc., d/b/a Shafrans, Appellants,
v.
VALLEY FORGE INSURANCE COMPANY, and a foreign corporation and First National Insurance Company of America, a Safeco Insurance Company, Respondents.
Court of Appeals of Washington, Division 1.
*416 Charles Kenneth Wiggins, Kenneth Wendell Masters, Wiggins Law Ofc., Bainbridge Is., Robert W. Burns, Hansville, for Appellants.
John Patrick Cook, Dirk Jonathan Muse, Lee, Smart, Cook, Martin & Patterson, Seattle, Lisa Allison Hollomon, Lee, Smart, Cook, Martin & Patterson, Bellevue, for Respondents.
Robert Francis Riede, Jerret E. Sale, Bullivant, Houser, Bailey, Pendergrass & Hoffman, Seattle, for First Nat. Ins. Co.
William Robert Hickman, Reed McClure, Seattle, for others.
*415 COLEMAN, J.
Leon Capelouto appeals the trial court's orders dismissing his coverage, bad faith, and Consumer Protection Act (CPA) claims against his insurers, Valley Forge Insurance Company and First National Insurance Company. Capelouto claims that an inadequate pump used on a sewer replacement project near his property caused sewage to back up into his basement. He contends that his insurers incorrectly concluded that an exclusion for damage caused by inadequate specifications or construction of property off of the premises prevents recovery for his losses, arguing that the exclusion is ambiguous and that the use of an inadequate pump is a distinct, covered peril. Capelouto also contends that his insurers erroneously concluded that any ensuing losses were caused by an excluded risk, water that had backed up from a sewer, arguing that sewage is a distinct peril and that the exclusion does not unambiguously apply to damage caused by sewage. Finally, Capelouto contends that his insurers failed to determine the efficient proximate cause of his loss, misrepresented facts, failed to disclose relevant policy provisions, and failed to inform him of the grounds for their denials.
Because neither inadequate specifications and the use of an inadequate pump nor sewage and sewer water can be reasonably understood to be distinct perils, we conclude that the policies' exclusions unambiguously preclude recovery for the claimed loss. Therefore, we affirm the orders dismissing Capelouto's coverage claims. We also conclude that Capelouto's bad faith and CPA claims are without merit, and we affirm the orders dismissing these claims.
FACTS
Leon Capelouto operates a retail business in a building he owns on California Avenue in West Seattle. At approximately 2:45 pm on February 21, 1996, he discovered raw sewage overflowing from his toilet. That day, King Construction Company was replacing the sewer pipes under California Avenue and had installed a temporary bypass of the main sewer line at a manhole approximately 100 feet from Capelouto's store. The bypass system consisted of a plug on the main sewer that was connected to hoses and a pump. When notified of the overflow, a project manager for King Construction told Capelouto that the bypass system was inadequate and had caused the sewage to back up. By the time the flow was stopped, approximately an hour after it had been discovered, six to eight inches of sewage covered Capelouto's basement floor, resulting in damage to fixtures and merchandise. Capelouto filed a claim with the City, which was referred to King Construction's insurer, but he ultimately rejected a settlement offer as inadequate.
On August 12, 1996, Capelouto submitted claims to Valley Forge and First National under his building, personal, and commercial property policies. In investigating the claims, the insurers interviewed Capelouto and visited the site of the loss. The insurers also interviewed King Construction's project manager, who reported that their bypass equipment had not failed, but was inadequate to handle the flow through the sewer line after it had rained. The project manager explained that they had not realized that storm drains were tied into the sewer line *417 above their bypass pump and that the accident occurred on the first day the bypass system was used in that area. Another King Construction employee, who had stopped the overflow, told the insurers that it had rained just before he learned of the accident. The insurers reviewed a blueprint of the area and the bypass system used in the sewer project. The insurers also obtained an analysis from Northwest WeatherNet, which concluded that it had likely rained in West Seattle on that day.
On December 4, 1996, Valley Forge denied coverage for the claim under its main policy, finding that the policy extended only limited coverage for $2,500 under an additional coverages endorsement. Valley Forge denied further coverage on the ground that all the possible efficient causes of the loss are excluded risks. Their investigation had identified three possible causes for the loss: the rain, King Construction's faulty bypass system, or a faulty, inadequate, or defective pump that Capelouto claimed was the efficient cause of the loss. The Valley Forge policy, however, does not cover damage caused by a weather condition which results in water backing up from a sewer or damage caused by faulty, inadequate, or defective design, specifications, workmanship, repair, and construction of property off of the insured's premises. Valley Forge concluded that King Construction's inadequate bypass system is an excluded risk under the latter provision and that the inadequacy of the pump is not a distinct peril.
On December 20, 1996, First National also denied coverage. First National concluded that the rain reported by King Construction's employees was the predominant cause of Capelouto's loss and that this peril is excluded by a weather conditions exclusion. First National further concluded that all other contributing causes of the loss are also excluded, citing an inadequate specifications or construction exclusion that is identical to the Valley Forge exclusion, and rejecting Capelouto's attempts to recharacterize the inadequate pump as a distinct peril.
Capelouto sued both insurers for breach of contract, bad faith handling and investigation of the claim, and violations of the Consumer Protection Act, RCW 19.86. Capelouto argued that the pump, not the rain, was the efficient proximate cause of his loss, and he produced evidence showing that it had not rained or had rained only lightly prior to the overflow. Capelouto also submitted expert testimony and analysis on the pump's limited capacity. The expert, Erik Davido, confirmed that the sanitary sewer pipe connected to Capelouto's building received rainwater as runoff from building roof drains and from two surface water catch basins. Davido estimated that at the time of the accident, most of the flow through the bypass system was rainwater. He concluded that the cause of the accidental overflow was the bypass pump, finding that the original sewer pipe had a larger capacity than the bypass system and that the pump would have had to operate continuously to prevent the other equipment from causing an overflow. His report concluded that the pump did not have the capacity to handle the peak minimum flow of sewage and rainwater that he had calculated for the day of the accident. He later testified that if the pump had been working properly, the bypass system would have been adequate to handle the expected sewage flow, but that the pump did not have the capacity to clear the minimum calculated flow of sewage and rainwater combined.[1] The trial court ultimately dismissed all of Capelouto's claims against the insurers, and Capelouto appealed.
ISSUES
Coverage Claims
Capelouto argues that the trial court erred in dismissing his coverage claims because the efficient proximate cause of his loss is covered by his insurance. Under the efficient proximate cause rule, when an insured risk sets into motion a sequence of events in which the last event is an excluded risk, the excluded risk will not defeat recovery. Findlay *418 v. United Pac. Ins. Co.,
We review the trial court's interpretation of an insurance policy de novo. See Smith v. Continental Cas. Co.,
Both the Valley Forge and First National policies state that the companies will not cover damage caused by
[f]aulty, inadequate or defective:
....
(2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, [or] compaction;
....
of part or all of any property on or off the described premises....
Capelouto is correct that the rule requiring strict construction of ambiguous terms applies with added force to exclusion clauses, which limit coverage under the policy. See Lynott v. National Union Fire Ins. Co.,
Nevertheless, Capelouto argues that the inadequate equipment used by King Construction for the bypass system is distinct from King Construction's inadequate design and specifications for the system or its workmanship and construction for the job. The characterization of perils as single or distinct is a contract question. See Sunbreaker Condo. Ass'n v. Travelers Ins. Co.,
As our Supreme Court has noted, "An insured may not avoid a contractual exclusion merely by affixing an additional label or separate characterization to the act or event causing the loss.'" Kish v. Insurance Co. of North Am.,
Given these principles, Capelouto's characterization of inadequate equipment as a distinct peril is an awkward interpretation of both the terms used in the exclusion and the events leading to his loss. As in Eide and Kish, the suggested distinction between the perils is artificial and does not reflect the ordinary consumer's understanding of the exclusion. See Eide,
Capelouto further argues that the exclusion does not apply because the quality of the constructed sewer was not affected. We reject this argument. The bypass system was part of the construction process, and the inadequacy of its design or specifications falls within the plain meaning of the exclusion. A common sense reading of the exclusion indicates that it applies to inadequate specifications for the execution of a project as well as to damage caused by inadequately or defectively constructed property. Cf. Kroll Constr. Co. v. Great Am. Ins. Co.,
Ensuing Loss Coverage. The exclusion for inadequate specifications or construction permits recovery for ensuing losses that result from covered risks, providing: "But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage." Ensuing loss provisions are exceptions to policy exclusions and thus should not be interpreted to create coverage. See McDonald,
The policies provide that water that backs up from a sewer or drain is an excluded cause of loss. Capelouto argues, however, that this exclusion does not apply because the damage caused by the sewage was independent of the damage caused by the backed-up sewer water. He further argues that sewage is distinct from water, and thus is not within the ordinary meaning of the exclusion, and that the exclusion is ambiguous.
As noted above, we interpret insurance contracts to give them a fair, reasonable, and sensible construction consistent with the understanding of an average person purchasing insurance. Kitsap County,
In his argument, Capelouto relies on two Florida cases in which the courts held that such language is ambiguous or raises a substantial issue regarding whether sewage is water within the meaning of the policy. Florida Farm Bureau Ins. Co. v. Birge, 659 *420 So.2d 310, 311 (Fla.Dist.Ct.App.1994); Sterling v. City of West Palm Beach,
Bad Faith and CPA Claims
Capelouto also contends that the trial court erred in dismissing his bad faith and CPA claims. Our review of the trial court's dismissal of these claims is de novo, and we note that we may sustain the trial court's judgment on any theory established by the pleadings and proof. Stuart v. American States Ins. Co.,
In Coventry Assocs. v. American States Ins. Co.,
Misrepresentation and Bad Faith Investigation. Capelouto first argues that his insurers misrepresented pertinent facts and failed to conduct an adequate investigation of his claim and the efficient proximate cause of his loss. An insurer must make a good faith investigation of the facts supporting a claim and may not deny coverage if a reasonable investigation would have proved the insurer's defense to be without merit. Industrial Indem. Co. v. Kallevig,
But here, unlike the situation in Kallevig, the insurers' denial of the claims was based in part on their conclusion that all causes of the loss were excluded from coverage. Thus, the decision to deny coverage without further investigation, despite contradictory evidence of causation, was not unreasonable or "based upon suspicion and conjecture." Kallevig,
Failure to Disclose Relevant Policy Provisions. Capelouto next contends that *421 First National's denial letter failed to quote amended language that was incorporated by an endorsement for Washington policies. The paragraph introducing policy exclusions, as quoted in the denial letter, states:
We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
The amended paragraph provides:
We will not pay for loss or damage caused by any of the excluded events described below. Loss or damages will be considered to have been caused by an excluded event if the occurrence of that event:
(a) Directly and solely results in loss or damage; or
(b) Initiates a sequence of events that results in loss or damage, regardless of the nature of any intermediate or final event in that sequence.
The amendment recognizes our courts' use of the efficient proximate cause rule to determine coverage under an insurance contract. The unamended language, however, does not preclude application of the rule. Rather, our courts have interpreted such provisions as referring to the efficient cause of a loss, thus ensuring that the intent and reasonable expectations of the parties to the contract are given effect. See Safeco Ins. Co. of Am. v. Hirschmann,
Capelouto also argues that First National omitted part of the policy provision excluding damage caused by inadequate specifications or construction. First National's denial letter does not notify the insured that the exclusion applies to damage caused by inadequate specifications or construction "of part or all of any property on or off the described premises." Capelouto contends that this language is significant because it indicates that the exclusion only applies when the quality of the final constructed property is impaired. This argument is based on a strained interpretation of this language, as discussed above, and we reject the argument that its omission constituted an actionable violation of the insurance regulations. See Coventry,
Capelouto finally argues that Valley Forge "failed to advise [him] that its own policy distinguishes between `materials' and `equipment', but it nonetheless concluded that inadequate equipment is excluded by its inadequate materials exclusion." Brief of Appellant, at 23. Valley Forge's denial of the claim, however, did not rely on the materials exclusion, but instead characterized the inadequate pump as the same peril as inadequate workmanship, specifications, or construction.[2] Furthermore, Capelouto does not show how he has been harmed by the alleged violation. Thus, we conclude that this contention also lacks merit.
Failure to State the Specific Grounds for Denying a Claim. Capelouto also contends that his insurers failed to explain the factual or legal basis supporting their denial of his claims. But contrary to his assertions, both denial letters set forth the insurers' understandings of the circumstances of the loss and the policy provisions governing coverage of the claim. In addition, both letters directly *422 responded to Capelouto's characterization of the pump as a distinct peril and attempted to explain the insurers' views on the applicable law. First National's denial letter states:
Your counsel, William Burns, has contended the pump was faulty or defective.... Mr. Burns has further stated the pump's inability to handle the increased load of sewer effluent involves defective or inadequate "equipment" which he claims is not excluded under the [inadequate construction or specifications] exclusion. Washington courts disregard attempts to affix an additional label or separate characterization to an act or event causing a loss in an attempt to avoid an unambiguous contractual exclusion. In this case, the pump[,] which was neither faulty [n]or defective, was merely inadequate to the task of diverting the excess water due to the recent "rain squall." Consequently, the pump's inadequacy did not involve a peril separate and apart from faulty, inadequate repair, workmanship, construction or specifications.
Valley Forge's denial letter contained a similar discussion with citation to authority.
Capelouto disagrees with this characterization of the inadequate pump and inadequate construction or specifications as the same peril. But "[a]cts performed in good faith under an arguable interpretation of existing law do not constitute unfair conduct violative of the consumer protection law." Leingang v. Pierce County Med. Bureau, Inc.,
Capelouto also argues that First National failed to include in its denial letter an exclusion for damage caused by pollution. Capelouto argues that such conduct constitutes bad faith when, as here, the insurer later attempts to raise the exclusion as a defense to coverage. Capelouto has not shown, however, that he was prejudiced by this omission. The omission did not affect his decision to investigate and pursue litigation to determine the efficient cause of his loss, which he contended was a separate, covered peril. Thus, we also reject this contention.
Contrary to Capelouto's assertions, the factual issues presented by his bad faith and CPA claims are susceptible to summary judgment. Summary judgment may be granted when reasonable minds could reach only one conclusion from the evidence. White v. State,
GROSSE, J., and BAKER, J., concur.
NOTES
Notes
[1] In a declaration, Davido later explained that the pump had the capacity to handle the average expected sewage flows if it was operating continuously and at an optimum level, but did not have the capacity to handle a flow exceeding the average expected sewage flow or an average sewage flow augmented with rainwater.
[2] Valley Forge's denial letter stated: "[T]he loss is excluded by virtue of the cause being `faulty, inadequate or defective design, specifications, workmanship, repair, construction, renovation, remodeling ...' o[f] part or all of any property on or off the described premises.
"....
"... [I]f the specified pump was inadequate for any of the reasons outlined above, it created a peril no different from that encompassed within the exclusions for faulty, defective or inadequate design, specification, or construction."