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                                                  2015 AUG 2U AM 10=

     IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON



ZHAOYUN XIA, a single person;              No. 71951-3-1
ISSAQUAH HIGHLANDS 48, LLC, a
Washington limited liability company;      DIVISION ONE
ISSAQUAH HIGHLANDS 50, LLC, a
Washington limited liability company;
GOTTLIEB ISSAQUAH HIGHLANDS 48,
LLC, a Washington limited liability
company; and GOTTLIEB ISSAQUAH
HIGHLANDS 50, LLC, a Washington
limited liability company,

                    Appellants/
                    Cross Respondents,

             v.

                                           UNPUBLISHED
PROBUILDERS SPECIALTY
INSURANCE COMPANY, RRG, a                  FILED: August 24, 2015
foreign insurance company authorized to
conduct business within the state of
Washington; OLYMPIC ADVANTAGE,
INC., a Washington corporation;
TREACY DUERFELDT and JANE DOE
DUERFELDT, husband and wife, and the
marital community composed thereof;
LAMBIN INSURANCE SERVICES, INC.,
a Nevada corporation doing business in
the state of Washington; FLYING EAGLE
INSURANCE SERVICES, INC., a
Nevada corporation licensed to do
business in the state of Washington; and
DAVID W. LAMBIN and JANE DOE
LAMBIN, husband and wife, and the
marital community composed thereof,

                    Respondents/
                    Cross Appellants.
No. 71951-3-1/2



        Cox, J. — Zhaoyun Xia appeals the summary judgment order in favor of

ProBuilders Specialty Insurance Company that also denies her motion for

summary judgment and dismisses this action. There are no genuine issues of

material fact whether ProBuilders, the insurer, had a duty to defend under the

pollution exclusion of the policy of insurance applicable to Xia's claim against

Issaquah Highlands 48, LLC, the named insured, and related entities (collectively

"Issaquah Highlands"). ProBuilders had no duty to defend and was entitled to

judgment as a matter of law. But there are genuine issues of material fact

regarding Xia's Consumer Protection Act and Insurance Fair Conduct Act claims

against ProBuilders. Accordingly, we affirm in part, reverse in part, and remand

for further proceedings.

        Issaquah Highlands 48, LLC was the general contractor of the "Villaggio

TownHomes" a housing development in Issaquah. It purchased a $1,000,000

general liability insurance policy for the development from ProBuilders. The

policy term was from July 7, 2005 to July 7, 2006.

        In May 2006, Xia purchased one of the homes at the Villaggio

TownHomes. After moving in, she began experiencing dizziness, fatigue, limb

numbness, and other symptoms. She was diagnosed as suffering from carbon

monoxide poisoning. The Social Security Administration later determined that

she was disabled. In December 2006, Puget Sound Energy determined that

toxic levels of carbon monoxide were leaking within her home from a gas water

heater. The exhaust vent of the water heater was never connected to an exterior

vent.
No. 71951-3-1/3


        In June 2007, Xia informed Issaquah Highlands, in writing, of her claim

based on her carbon monoxide poisoning. Issaquah Highlands forwarded her

letter to its insurance broker. The broker submitted the claim to the claims

administrator for ProBuilders, NBIS Claims & Risk Management, Inc., in July

2007.

        By letter dated January 17, 2008, NBIS notified Issaquah Highlands that

ProBuilders "wfpuld] neither defend nor indemnify" it and "any judgment or

settlement obtained by [Xia] predicated upon damages that fall outside the

[policy]" would be the responsibility of Issaquah Highlands.1 By letter dated June

12, 2008, NBIS also notified counsel for Xia that ProBuilders "will neither defend

nor indemnify" Issaquah Highlands in language and scope virtually identical to

the January 17, 2008 letter to the insured.2

        In January 2009, Xia commenced a personal injury action against

Issaquah Highlands 48, LLC and others. In that action, she claimed damages for
injuries caused by her carbon monoxide poisoning. Xia sent a courtesy copy of

the pleadings to NBIS, the agent for ProBuilders.

        In December 2010, Xia notified ProBuilders through its agent NBIS that

she planned to enter into a settlement with Issaquah Highlands in her personal

injury action. The letter also stated that if they did not receive written

correspondence within 30 days stating that ProBuilders would provide coverage




        1 Clerk's Papers at 285.

        2 Id. at 292.
No. 71951-3-1/4


and defend Issaquah Highlands, she would have no option but to enter into the

settlement.

      Thereafter, Xia entered into a settlement agreement with Issaquah

Highlands in the amount of $2,000,000. The agreement provided that Xia would

take an assignment of Issaquah Highlands' rights against ProBuilders, its insurer.

In exchange, Xia covenanted not to execute a judgment against Issaquah

Highlands.

       Xia gave ProBuilders notice of the motion for determination of

reasonableness of the settlement. ProBuilders elected not to attend the hearing.

       The trial court found the settlement agreement to be reasonable. It

entered judgment against Issaquah Highlands in favor of Xia in the amount of

$2,000,000.

       In May 2011, Xia, as assignee of Issaquah Highlands, sent NBIS and

ProBuilders a 20-day notice of intent to commence Insurance Fair Conduct Act

litigation. Later that month, ProBuilders, through its agent NBIS, reiterated in
writing its prior statements of position that it would neither defend nor indemnify
on the asserted basis that Xia's claim was not covered by the policy.

       Xia commenced this action against ProBuilders. She asserted claims of

breach of the insurance contract, bad faith, and violations of the Consumer

Protection Act (CPA) and the Insurance Fair Conduct Act (IFCA). She sought a

declaratory judgment that ProBuilders had a duty under the policy to defend and
indemnify its insured in connection with her personal injury action.
No. 71951-3-1/5


      Following cross-motions for summary judgment, the trial court orally

granted ProBuilders' motion. Sometime later, following Xia's motion for

reconsideration, the court entered its summary judgment order in favor of

ProBuilders. The order also denied Xia's motion for summary judgment and

dismissed this action.

      Xia appeals. ProBuilders cross-appeals the trial court's denial of its

summary judgment motion that the pollution exclusion provision of its policy

barred coverage.

                               DUTY TO DEFEND

       Xia argues that the trial court erred by granting summary judgment to

ProBuilders, denying her motion, and dismissing this case. She claims that

ProBuilders had a duty to defend its insured against her personal injury claim.

We hold that there were no genuine issues of material fact regarding the

insurer's duty to defend under the pollution exclusion provision. ProBuilders was

entitled to judgment as a matter of law.

       "The standard of review of an order of summary judgment is de novo."3

The court must consider all facts submitted and all reasonable inferences from

the facts in the light most favorable to the nonmoving party.4 Summary judgment

is appropriate only if there is no genuine issue of material fact, and the moving




       3 Smith v. Safeco Ins. Co., 150 Wn.2d 478, 483, 78 P.3d 1274 (2003).

       4 Graff v. Allstate Ins. Co., 113 Wn. App. 799, 802, 54 P.3d 1266 (2002).
No. 71951-3-1/6


party is entitled to judgment as a matter of law.5 A "material fact" is a fact upon

which the outcome of the litigation depends, in whole or in part.6

       "Language in an insurance policy is interpreted as a matter of law, and

construction of that language is reviewed de novo."7 "'In construing the language

of an insurance policy, the policy should be given a fair, reasonable, and sensible

construction as would be given to the contract by the average person purchasing

insurance.'"8 Where terms are undefined, they "'must be given their plain,

ordinary, and popular meaning.'"9 In determining this meaning, a court may look

to standard English dictionaries.10

          Exclusions are interpreted narrowly.11 They "'are to be most strictly

construed against the insurer.'"12




          5 CR 56(c).

          6 Barber v. Bankers Life & Cas. Co., 81 Wn.2d 140, 144, 500 P.2d 88 (1972).

          7 Expedia. Inc. v. Steadfast Ins. Co.. 180 Wn.2d 793, 802, 329 P.3d 59
(2014).

          8 Tyrrell v. Farmers Ins. Co. of Wash., 140Wn.2d 129, 133, 994 P.2d 833
(2000) (quoting Roller v. Stonewall Ins. Co., 115 Wn.2d 679, 682, 801 P.2d 207
(1990)).

          9 jd. (internal quotation marks omitted) (quoting Kitsap County v. Allstate Ins.
Co., 136Wn.2d567, 576, 964 P.2d 1173(1998)).

          10
               Id.


      11 Am. Best Food. Inc. v. Alea London, Ltd., 168 Wn.2d 398, 413, 229 P.3d
693(2010).

          12 la\ at 406 (quoting Phil Schroeder. Inc. v. Roval Globe Ins. Co., 99 Wn.2d
65, 68, 659 P.2d 509 (1983)).
No. 71951-3-1/7



       The duty to defend is one of the main benefits of the insurance contract.13

The duty to defend is different from and broader than the duty to indemnify.14

The duty to indemnify exists only if the policy "actually covers" the insured's

liability.15 The duty to defend is triggered if the insurance policy "conceivably

covers" allegations in the complaint.16

       "The duty to defend arises when a complaint against the insured,

construed liberally, alleges facts which could, if proven, impose liability upon the

insured within the policy's coverage.'"17 "[I]f there is any reasonable

interpretation of the facts or the law that could result in coverage, the insurer

must defend."18 Ifthe complaint is ambiguous, it will be liberally construed in

favor of triggering the insurer's duty to defend.19 "In deciding whether to defend,

an insurer may not put its own interest above that of its insured."20




          13 Truck Ins. Exch. v. Vanport Homes, Inc., 147 Wn.2d 751, 760, 58 P.3d 276
(2002).

          14 Am. Best Food. Inc.. 168 Wn.2d at 404.

          15 Id (emphasis omitted).

          16 |d. (emphasis omitted).

          17 la\ (internal quotation marks omitted) (quoting Truck Ins. Exch., 147 Wn.2d
at 760).

          18lg\at405.

          19 Truck Ins. Exch., 147 Wn.2d at 760.

          20 Am. Best Food. Inc.. 168 Wn.2d at 414.


                                                   7
No. 71951-3-1/8


       "An insurer is relieved of its duty to defend only if the claim alleged in the

complaint is 'clearly not covered by the policy.'"21 "Once the duty to defend

attaches, insurers may not desert policyholders and allow them to incur

substantial legal costs while waiting for an indemnity determination."22 "When the

facts or the law affecting coverage is disputed, the insurer may defend under a

reservation of rights until coverage is settled in a declaratory action."23

       The duty to defend is generally determined from the "eight corners" of the

insurance contract and the underlying complaint.24 There are two exceptions to

this rule and both favor the insured.25 First, if it is not clear from the face of the

complaint but coverage could exist, the insurer must investigate and give the

insured the benefit of the doubt.26 Second, if allegations in the complaint conflict

with facts known to the insurer or if the allegations are ambiguous, facts outside

the complaint may be considered.27 But "extrinsic facts may only be used to

trigger the duty to defend; the insurer may not rely on such facts to deny its

defense duty."28


       21 Woo v. Fireman's Fund Ins. Co., 161 Wn.2d 43, 60, 164 P.3d 454 (2007)
(quoting Truck Ins. Exch., 147 Wn.2d at 760).

       22 Truck Ins. Exch.. 147 Wn.2d at 761.

       23 Am. Best Food. Inc., 168 Wn.2d at 405.

       24 Expedia. Inc., 180 Wn.2d at 803.

       25 jd,

       26 id,

       27 id, at 803-04.

       28 id, at 804.
                                                8
No. 71951-3-1/9


         In its summary judgment order, the trial court granted summary judgment

to ProBuilders on two bases. First, because Xia's home fell within the

"townhouse exclusion" in the insurance contract. Second, because Issaquah

Highlands did not request ProBuilders to defend it from Xia's lawsuit. The trial

court declined to grant relief based on ProBuilders' argument that the "pollution

exclusion" of its policy also barred coverage of Xia's claim.

                                    Pollution Exclusion


         We first consider whether the trial court erred by denying Xia's motion for

summary judgment that the "pollution exclusion" was inapplicable as a matter of

law.29

         The controlling question is whether it is clear from examining the face of

the complaint and the insurance policy that the policy does not provide

coverage.30 We conclude by examining both that the pollution exclusion clearly

excludes coverage for Xia's claim. Accordingly, there was no duty to defend.

The court properly denied summary judgment to Xia on this alternative basis.

         The "pollution exclusion" excludes from coverage:

                 Bodily injury, property damage, or personal injury caused
         by, resulting from, attributable to, contributed to, or aggravated by
         the actual, alleged or threatened discharge, dispersal, seepage,
         migration, release or escape of pollutants, or from the presence
         of, or exposure to, pollution of any form whatsoever, and regardless
         of the cause of the pollution or pollutants.

                 This Exclusion applies regardless of the cause of the
         pollution and whether any other cause of said bodily injury, property
         damage, or personal injury acted jointly, concurrently or in any

         29 Brief of Appellant at 34-35.

         30 See Expedia. Inc.. 180 Wn.2d at 803.
No. 71951-3-1/10


      sequence with said pollutants or pollution. This Exclusion applies
      whether any other cause of the bodily injury, property damage, or
      personal injury would otherwise be covered under this insurance.

               . . ,[31]

      The policy defines "pollutant" as:

      [A]ny solid, liquid, gaseous or thermal irritants or contaminants,
      which include but are not limited to smoke, vapor, soot, fumes,
      acids, alkalis, chemicals, waste, biological elements and agents,
      and intangibles such as noise, light and visual esthetics, the
      presence of any or all of which adversely affects human health or
      welfare, unfavorably alters ecological balances or degrades the
      vitality of the environment for esthetic, cultural or historical
      purposes, whether such substances would be or are deemed or
      thought to be toxic, and whether such substances are naturally
      occurring or otherwise.



              Pollution as used herein means any form of pollutant which
      forms the basis for liability, whether the pollution is said to cause
      physical injury or not, which by volume or timing or any other factor
      is said to give rise to liability.!321

      In her amended complaint in her personal injury action against Issaquah

Highlands, Xia alleged that upon moving into her home she "began to feel ill and

started to experience unusual symptoms."33 She also alleged:

               On December 8, 2006, Puget Sound Energy found an indoor
      leak of Carbon Monoxide into Ms. Xia's town home.

               Puget Sound Energy discovered that the exhaust hose for
      Ms. Xia's hot water tank had never been connected and thus was
      allowing carbon monoxide to flow freely into Ms. Xia's town
      homeJ341


      31 Clerk's Papers at 375 (emphasis added) (emphasis omitted).

      32 jd, at 389 (emphasis added) (emphasis omitted).

      33 Jd, at 83.

      34 Jd,
                                           10
No. 71951-3-1/11




       She further alleged cognitive impairment and other bodily injuries caused

by exposure to carbon monoxide.

       We note that these allegations in Xia's personal injury action mirror those

in the recitation of "Facts" in the January 17, 2008 letter in which ProBuilders

declined to either defend or indemnify its insured. Specifically, there was no

material change of facts between ProBuilders' decision to deny a defense before

the action and the action that followed.


       It is clear from the definition in the policy that carbon monoxide is a

"pollutant." It is a gas and these fumes escaped from the hot water heater,

adversely affecting Xia's health. Moreover, this gas was toxic, at the levels of

exposure in this case. Thus, Xia's allegations fall within the plain language of

this exclusion.


       Moreover, the policy twice expressly states that the exclusion applies

"regardless of the cause of the pollution."35 And it expressly states that the

exclusion applies "whether any other cause of said bodily injury . . . acted jointly,

concurrently or in any sequence with said pollutants."36 It also expressly states

that it applies "whether any other cause of the bodily injury . . . would otherwise

be covered under this insurance."37 Thus, even ifthe negligence of the installer

of the water heater was a cause of the pollution or Xia's injuries, such underlying

negligence is immaterial to the application of this exclusion.


       35 jd, at 375.

       36 id,

       37 Id.

                                             11
No. 71951-3-1/12


      Accordingly, liberally construing the allegations of Xia's amended

complaint in her personal injury action does not show facts that could, if proven,

impose liability upon the named insured within the policy's coverage.

       Heavily relying on Kent Farms, Inc. v. Zurich Insurance Co.,38 Xia argues

that her underlying cause of action is rooted in negligence, not the release of

pollutants.39 According to her, whether an exclusion applies is necessarily a fact-

specific inquiry.40 And she claims the trial court erred in refusing on summary

judgment "to resolve the ambiguity in the pollution exclusion in favor of

coverage."41

       We see no ambiguity in the pollution exclusion provision of this policy for

reasons we have already discussed. We conclude that an insured would

reasonably read the policy in the same way we do.

       Xia's claim that her cause of action is rooted in negligence does not help

her. As we observed earlier in this opinion, the plain language of the policy

states that the exclusion applies "regardless of the cause of the pollution and

whether any other cause of said bodily injury . . . acted jointly, concurrently or in

any sequence with said pollutants."42 Regardless of her characterization of "the

cause," this wording makes clear that the existence of other causes is immaterial.


       38 140 Wn.2d 396, 998 P.2d 292 (2000).

       39 Brief of Appellant at 36-40.

       40 Jd, at 36, 40.

       41 Id, at 40.

       42 Clerk's Papers at 375.


                                             12
No. 71951-3-1/13


       The essence of Xia's argument is that Kent Farms controls this case, not

Quadrant Corp. v. American States Insurance Co.43 After a careful review of

these authorities, we also conclude that Quadrant dictates that the pollution

exclusion provision in this policy bars coverage of Xia's claim.

       In Quadrant, the supreme court held that a pollution exclusion provision

applied to preclude coverage for claims for injuries caused by fumes from

waterproofing material that entered the plaintiff's apartment building.44 In doing

so, the court reaffirmed the continuing validity of Cook v. Evanson, a decision

from this court.45 Cook involved fumes from a sealant applied by a contractor.46

The contractor failed to properly seal off the fresh air intake, and fumes were

drawn into the building, injuring the occupants.47

      The Quadrant court first rejected the plaintiff's argument that absolute

pollution exclusions apply only to environmental harms, not personal injuries

arising from ordinary negligence.48 It stated that "a majority of courts has

concluded that absolute pollution exclusions unambiguously exclude coverage

for damages caused by the release of toxic fumes."49



      43154Wn.2d 165, 110 P.3d 733 (2005).

      44 Jd, at 167.

      45 Jd, (citing Cook v. Evanson. 83 Wn. App. 149, 920 P.2d 1223 (1996),
review denied. 131 Wn.2d 1016 (1997)).

      46 Cook, 83 Wn. App. at 151.

      47 Jd,

      48154 Wn.2d at 173-74.

       49 Id, at 173.
                                            13
No. 71951-3-1/14



       The court then examined what it called "Absolute Pollution Exclusions in

Washington."50 It started with this court's decision in Cook and traced the line of

cases that followed.51 When it reached Kent Farms, the court noted that the

decision in that case did not mention this court's decision in Cook.52 In applying

the pollution exclusion provision in Quadrant, the court noted that this court's

holding in Cook was based on the underlying injury and cause of action being

primarily the result of the toxic character of the pollutant.53

       The supreme court also noted that the "fumes" cases were factually

distinguishable from Kent Farms.54 Thus, it stated, "[W]hen fumes caused injury

and where the pollutant was being used as it was intended," the Cook reasoning

controls.55

       Accordingly, the Quadrant court concluded that the pollution exclusion

applied to bar coverage.56 The tenant in the apartment building was injured by

fumes coming from toxic water proofing material that was being used as intended

outside the building.57 The air in the tenant's apartment was "polluted" when the



       50 Jd,   at 174.


       51 Jd,   at 174-79.


       52 Jd,   at 178.


       53 Jd, at 179.

       54 Jd,

       55 Jd,

       56 Jd,

       57 Id.


                                               14
No. 71951-3-1/15


fumes entered the building because the contractor had not properly vented the

area where the toxic material was drying.58

       The present case most closely resembles Quadrant. Here, Xia was

injured by fumes from toxic levels of carbon monoxide coming from the

improperly vented gas water heater in her home. The carbon monoxide rose to

toxic levels within the home because the installer failed to properly vent the water

heater to the outside. Thus, the air in Xia's home was polluted. The exclusion

applies. Liability imposed on the named insured is not within this policy's

coverage. Denial of summary judgment to Xia was correct on the alternative

basis of this reasoning.

      Xia argues that the facts of this case are analogous to Kent Farms, not

Quadrant. We disagree.

       She argues that unlike the sealant in Quadrant, carbon monoxide occurs

naturally and is not harmful in small quantities. She further argues that the

carbon monoxide in this case was never "used." And she argues that she would

not have been injured if the water heater was used as intended.

       But all of these arguments go to causation, which is immaterial under the

express language of the pollution exclusion provision in this case. As already

discussed, the language of the pollution exclusion in this case expressly applies

"regardless of the cause of the pollution and whether any other cause of said




       58 Jd,


                                              15
No. 71951-3-1/16



bodily injury . . . acted jointly, concurrently or in any sequence with said

pollutants."59

       Further, these arguments do not materially distinguish this case from

Quadrant. This case, like Quadrant, involved a pollutant causing injury because

it is a pollutant. Xia's reliance on Kent Farms is misplaced, because Kent Farms

is factually distinguishable. In that case, a fuel deliveryman was injured when the

fuel storage tank's intake valve malfunctioned and diesel fuel began to spill from

the tank.60 While attempting to prevent the spill, the deliveryman was doused

with fuel, which went down his throat and into his lungs and stomach.61 Kent

Farms' insurance company denied coverage based on a pollution exclusion.62

On review, the supreme court determined that the pollution exclusion was

inapplicable, stating that the cause of action was "rooted in negligence, not in

environmental harm caused by pollution" because the plaintiff alleged

"negligence in the maintenance and design of a fuel storage facility that resulted

in immediate bodily injury when a high-pressure jet of liquid struck him."63

       As Quadrant later noted, Kent Farms "distinguished between cases in

which the substance at issue was polluting at the time of the injury and cases in




       59 Clerk's Papers at 375 (emphasis added) (emphasis omitted).

       60 Kent Farms, 140 Wn.2d at 397-98.

       61 Jd, at 398.

       62 Jd,

       63 Jd, at 399.


                                              16
No. 71951-3-1/17


which the offending substance's toxic character was not central to the injury."64

In Kent Farms, the court reasoned, "[The deliveryman] was not polluted by diesel

fuel. It struck him; it engulfed him; it choked him. It did not pollute him. Most

importantly, the fuel was not acting as a 'pollutant' when it struck him . . . ,"65

Quadrant later distinguished Kent Farms on this basis.

       We distinguish this case from Kent Farms on the same basis. The carbon

monoxide was "acting as a pollutant" at the time of Xia's injury and the

substance's toxic character is central to her injury. That the negligent installation

of the water heater caused the toxic levels of gas to escape is immaterial. Like in

Cook and Quadrant, this case arises from a toxic substance, acting as such,

causing physical injury. That negligence was also involved is not material for the

reasons explained in those cases. Quadrant controls.

       Finally, we note that there is no argument here that the policy is illusory

because of its terms and conditions. Likewise, there is no insurance legislation

that has been called to our attention to address the breadth of the pollution

exclusion in this case. Both points were discussed in Quadrant.66 Neither is at

issue here.

       To summarize, the pollution exclusion applies. The toxic levels of gas in

Xia's home polluted the air. There was no duty to defend on the basis of this




       64 Quadrant Corp., 154 Wn.2d at 182.

       65 Kent Farms, 140 Wn.2d at 401.

       66 Quadrant Corp., 154 Wn.2d at 184-86.


                                               17
No. 71951-3-1/18



exclusion. On this alternative basis, we hold that the trial court properly denied

summary judgment to Xia.

                               Townhouse Exclusion

       Xia argues that the trial court erred when it concluded that ProBuilders

had no duty to defend based on the insurance policy's Condominium or

Townhouse Liability Exclusion ("townhouse exclusion"). We agree.

       Here, the trial court ruled, in part, that when ProBuilders denied coverage

in its January 17, 2008 letter "itwas correct because the townhouse exclusion

properly applied and excluded all coverage."67 This was incorrect.

       As we stated earlier in this opinion, the threshold question in determining

whether there is a duty to defend is whether Xia's amended complaint in her

personal injury action, construed liberally, alleges facts that could, if proven,

impose liability covered by the ProBuilders policy.

       As counsel for Xia properly acknowledged during oral argument of this

case before this court, the subject property is not a condominium. Thus, that part

of the exclusion in the policy is not material to this case. ProBuilders does not

argue otherwise.

       The townhouse exclusion excludes from coverage:

               Property damage or bodily injury within the products-
       completed operations hazard arising from, related to or in any way
       connected with your work or your work product which is, is part of
       or is incorporated into or upon a . . . townhouse project, or to
       personal injury or advertising injury arising or resulting from your
       operations performed upon, at or for a . . . townhouse project.1681

       67 Clerk's Papers at 1299.

       68 Clerk's Papers at 379 (emphasis added) (emphasis omitted).

                                              18
No. 71951-3-1/19




      Thus, the question is whether Xia's home was part of a "townhouse

project." The policy does not define the term "townhouse project." ProBuilders

contends that Xia's home constitutes a "townhouse" within the meaning of the

exclusion. Xia disagrees, asserting that she owns a "zero lot line" home and that

it does not fall within the ordinary meaning of the policy exclusion for townhouse.

She further asserts that to the extent the term is ambiguous, this ambiguity

imposed on ProBuilders the duty to defend.

      Where terms are undefined, they "'must be given their plain, ordinary, and

popular meaning.'"69 In determining this meaning, a court may look to standard

English dictionaries.70 "If words have both a legal, technical meaning and a plain,

ordinary meaning, the ordinary meaning will prevail unless it is clear that both

parties intended the legal, technical meaning to apply."71

       The Merriam-Webster Online Dictionary defines "townhome" or "town

house" as: "[A] house that has two or three levels and that is attached to a similar

house by a shared wall."72 And Black's Law Dictionary defines "townhouse" or

"townhome" as: "A dwelling unit having usu[ally] two or three stories and often




       69 Tyrrell, 140 Wn.2d at 133 (internal quotation marks omitted) (quoting Kitsap
County. 136 Wn.2d at 576).

       70 Jd,

       71 Kitsap County. 136 Wn.2d at 576.

       72 Merriam-Webster Online Dictionary, httpV/www.merriam-
webster.com/dictionary/town+house (last visited July 31, 2015) (emphasis added).

                                             19
No. 71951-3-1/20


connected to a similar structure by a common wall and (particularly in a planned-

unit development) sharing and owning in common the surrounding grounds."73

       These definitions explain that the plain meaning of a townhouse is a

structure that has either a "shared" or a "common" wall with adjacent units.

Looking to Xia's complaint on its face, it is not clear whether her home falls within

the plain meaning of this definition. Whether Xia's home had shared or common

walls is the determinative question for purposes of applying this exclusion.

Accordingly, because coverage was not clear from examining the face of the

complaint but might have existed, ProBuilders had a duty to investigate the claim

and give the insured the benefit of the doubt.

        Further, we note that the allegations in Xia's complaint conflicted with facts

either known or that should have been known to ProBuilders. Specifically,

ProBuilders knew that Xia's home was marketed as a "zero lot line" home. A

zero lot line townhouse must have "independent structural walls."74 Specifically,

an air gap must exist between the structural walls of the units.

        Presumably, when underwriting the policy it issued in this case,

ProBuilders either knew or should have known of the physical characteristics of

the units in this development. In either event, at minimum, the insurer had a duty

to investigate to verify whether the home had shared or common walls in order to

apply the townhouse exclusion. There is no evidence in this record to show that

it did so.



        73 Black's Law Dictionary 1720 (10th ed. 2014) (emphasis added).

        74 Clerk's Papers at 177.


                                              20
No. 71951-3-1/21



       In sum, on examining the "eight corners" of Xia's amended complaint and

the policy, it was unclear whether the townhouse exclusion applied. Because of

the uncertainty, the proper course of action for ProBuilders was to investigate

and defend under a reservation of rights and commence a declaratory judgment

action to obtain a court ruling on the applicability of the exclusion.75 ProBuilders

was not entitled to make this judgment on its own, leaving its insured to

undertake its defense at its own expense.

       ProBuilders makes several arguments why we should accept its reading of

the word "townhouse." But these are arguments that should have been made to

the trial court in a declaratory judgment action following the acceptance of a

tender of defense under a reservation of rights and investigation.

       ProBuilders argues that Xia consistently referred to her house as a "town

home" or "town house" in her original and amended complaints. ProBuilders also

argues that photographs of the Villaggio townhouses reveal that they are

connected by shared walls with no visible air space between the units and thus,

they fall within the definition of "townhouse." These are factual matters to be

resolved by a court in a declaratory action, following acceptance of a tender of

defense under a reservation of rights.

       ProBuilders argues that American States Insurance Co. v. Delean's Tile

and Marble LLC "disposes of" Xia's argument that the air gap between the units

indicates that her home is not a "town home."76 In that case, this court stated


       75 See Truck Ins. Exch.. 147 Wn.2d at 761.

       76179 Wn. App. 27, 319 P.3d 38 (2013).


                                             21
No. 71951-3-1/22


that contractors were "incorrect in their contention that the one inch air space

between the inner walls of the buildings legally separates the units."77

ProBuilders asserts, "As in Delean's, the Villaggio townhouse units at issue here

were not noticeably separate from one another and were for all appearances part

of a single building with shared siding and a shared roof."78 Had this argument

been made to the trial court in a declaratory judgment action following

acceptance of defense under a reservation of rights, we believe the court would

have rejected it.

       The Delean's court was considering whether townhouse buildings with a

one inch air space between them fell within the plain meaning of the term

"detached."79 The court was not considering whether such homes fell within the

plain meaning of the term "townhouse."

       To summarize, to the extent the townhouse exclusion was a basis for the

refusal to defend, the refusal to defend was incorrect. Acceptance of the tender

of defense with a reservation of rights, followed by investigation and a

declaratory judgment action to obtain a court ruling on this exclusion was the

proper course of action.




       77 Brief of Respondent PBSIC Specialty Insurance Company RRG at 25
(quoting Delean's, 179 Wn. App. at 39)).

       78 Jd,

       79 Delean's, 179 Wn. App. at 38-40.


                                             22
No. 71951-3-1/23



       Thus, to the extent the trial court granted summary judgment to

ProBuilders on this basis, it erred. Because we have decided that the pollution

exclusion provided a basis to decline to defend, this error was harmless.

                                    Formal Tender

       We next consider whether the trial court properly granted summary

judgment to ProBuilders based on the named insured's failure to formally tender

defense against Xia's personal injury action. We hold that granting summary

judgment on this basis was also incorrect.

       Here, the trial court ruled, in part, that "there was no request for a defense

of the suit from or on behalf of the named insured to the insurer.

       An insurer's duty to defend "'arises when a complaint against the insured,

construed liberally, alleges facts which could, if proven, impose liability upon the

insured within the policy's coverage.'"80 But "'[a]n insurer cannot be expected to

anticipate when or if an insured will make a claim for coverage; the insured must

affirmatively inform the insurer that its participation is desired.'"81 "Thus, 'breach

of the duty to defend cannot occur before tender.'"82 "The duties to defend and

indemnify do not become legal obligations until a claim for defense or indemnity

is tendered."83



       80 Expedia, Inc.. 180 Wn.2d at 802-03 (internal quotation marks omitted)
(quoting Am. Best Food, Inc., 168 Wn.2d at 404-05).

       81 Mut. of Enumclaw Ins. Co. v. USF Ins. Co., 164 Wn.2d 411, 421, 191 P.3d
866 (2008) (internal quotation marks omitted) (quoting Griffin v. Allstate Ins. Co., 108
Wn. App. 133, 140, 29 P.3d 777, 36 P.3d 552 (2001)).

       82 Jd, (quoting Griffin, 108 Wn. App. at 141).

       83 id, (emphasis omitted).
                                              23
No. 71951-3-1/24



       Here, ProBuilders argues that it had no duty to defend because its named

insured failed to tender defense when Xia commenced her personal injury action.

In doing so, it relies on policy language that states:

       [ProBuilders] will have the right and duty to defend you, the Named
       Insured, against any suit seeking those damages provided that no
       other insurance affording a defense against such a suit is available
       to you.'841

       In response, Xia makes several arguments. First, she argues that the

facts of this case do not permit ProBuilders to rely on a formal tender where that

would have been a useless act. Second, she argues that ProBuilders may not

rely on tender as a condition precedent to its duty to defend where it cannot show

prejudice from any lack of notice. Third, she argues that ProBuilders may not

now rely on this reason since it advanced the exclusions in the policy as the sole

bases for refusing to defend. Finally, she argues that the selective tender rule is

inapplicable to this case. We address the first and last arguments and need not

address the others.


       With respect to the first argument, Moratti v. Farmers Insurance Co. of

Washington is instructive.85 There, the attorney for an injured claimant "made

several demands to the insurance adjuster" who ultimately responded and

"denied any negligence for the injury."86 The claimant's attorney then called the

insurance adjuster to ask if he should send the settlement package.87 The


       84 Clerk's Papers at 372 (emphasis added) (emphasis omitted).

       85162 Wn. App. 495, 254 P.3d 939 (2011).

       86 jd, at 499-500.

       87 id, at 500.
                                              24
No. 71951-3-1/25


adjuster told him not to bother and informed him that the decision on no liability

was final.88

       There was a settlement between the claimant and the insured.89 The

insured agreed to pay a substantial sum and stipulated to entry of judgment

against him in exchange for a covenant not to execute on the judgment against

him.90 He assigned to the claimant his claims against his insurer.91 The court

approved the settlement at a reasonableness hearing.92

       The claimant/assignee of rights against the insurer commenced an action

against the insurer.93 At the conclusion of trial, the trial judge entered judgment

against the claimant.94

       On appeal, this court reversed.95 This court rejected the insurance

company's claim that the failure to make a formal demand for a defense barred

the plaintiff's claims.96 It stated:

       We can give no credence to Farmers' assertion that it did not have
       to respond until 2004 because no settlement offer or demand was


       88 Id,

       89 id.

       90 id.

       91 id. at 501.

       92 Id,

       93 id.

       94 id.

       95 id. at 512.

       96 Id. at 504.


                                             25
No. 71951-3-1/26


       made or suit filed until then. Farmers' argument conveniently
       ignores that in October 2002, when [the claimant's] counsel
       inquired as to whether Farmers would reconsider its position if he
       sent the demand letter, he was told that Farmers' decision was
       final. Relying on Farmers' stated position, [the claimant's]
       counsel did not undertake the expense of submitting a futile
       demand letter to Farmers. Nor was he required to do so as the
       law does not require someone to do a useless act Since it was
       Farmers' own representation that prevented a formal demand letter,
       it cannot now argue that failure to make the demand bars [the
       claimant's] claim.[97]

       Here, like in Moratti, ProBuilders unambiguously stated to its named

insured by letter dated January 17, 2008 that it would not defend its insured.

Specifically, it stated it "will neither defend nor indemnify" the named insured and

"any judgment or settlement obtained by [Xia] predicated upon damages that fall

outside the [policy]" would be the responsibility of the named insured.98 It also

asked for pleadings in the event of a lawsuit. These were provided, albeit by Xia.

       The plain words of this pre-suit communication indicate ProBuilders would

not be involved even if either a settlement or a lawsuit followed. Otherwise, there

would have been no reason to mention "judgment" or "settlement" in this letter.

And this record makes plain this statement of position did not change when the

suit was filed, despite the lack of any material change in the allegations of Xia's

amended complaint. The record is equally clear that Xia provided pleadings and

other materials to ProBuilders to keep it apprised of developments.

       It is noteworthy that ProBuilders, by letter dated June 12, 2008 to counsel

for Xia, reiterated the statement of position in its prior letter to its named insured.


       97 jd, at 504-05 (emphasis added).

       98 Clerk's Papers at 285.


                                              26
No. 71951-3-1/27


Specifically, it repeated that it "will neither defend nor indemnify" the named

insured, using language that is substantially similar to the January 17, 2008 letter

to the named insured.99

       Why ProBuilders deemed it necessary to communicate with Xia, who was

never its named insured, is left unexplained in this letter. But it is inconsistent

with the argument that ProBuilders now makes that the lack of notice of Xia's

"suit" from its named insured is fatal to its duty to defend.

       ProBuilders asserts that "Xia is not [ProBuilders'] insured and has no

authority under Washington law to tender a defense to an insurer with which she

has no contractual relationship."100 And it asserts that Xia's communications with

ProBuilders "are wholly irrelevant to the issue of tender—an issue that turns

entirely on [the named insured's] communications with its insurer."101

ProBuilders provides no authority to support these assertions. We must

conclude that this lack of citation to authority means there is none.

       We note that ProBuilders received notice of Xia's subsequent lawsuit

when Xia sent a courtesy copy of the summons and complaint to ProBuilders in

January 2009. And in December 2010, Xia's attorney sent a letter to ProBuilders

with the stated purpose of "providpng] notice that your insureds have entered into

a tentative agreement to assign claims to Ms. Xia that they have against you."102


       99 id, at 292.

       100 Brief of Respondent PBSIC Specialty Insurance Company RRG at 12.

       101 id, at 13.

       102 Clerk's Papers at 912.


                                              27
No. 71951-3-1/28


The letter stated, "The defense of Ms. Xia's claims was tendered to you and

rejected on June 12, 2008."103 It asserted that ProBuilders was "wrongfully

relying on [the] pollution exclusion" and that the "townhouse exclusion is not a

valid basis to deny coverage or defense."104 It further stated:

              A hearing on a motion to approve the settlement and its
       reasonableness has been scheduled for February 7, 2010. Unless
       we receive written correspondence within 30 days of the date
       of this letter stating that you will provide coverage and defend
       [Issaquah Highlands], Ms. Xia will be left with no other option
       but to enter into the settlement and move forward with the
       hearing to approve its reasonableness. Once the settlement is
       executed and approved, Ms. Xia will immediately bring actions
       against [ProBuilders] based [on] its failure to defend and the
       theories referenced above.[1051

       Given these facts, we conclude that ProBuilders' argument is

unpersuasive. The pre-suit letter to its named insured clearly states it would not

be involved even if a settlement or a lawsuit followed. Otherwise, there would

have been no reason to mention "judgment" or "settlement" in this letter. As

Moratti indicates, the law does not require a useless act.

       Moreover, ProBuilders dealt with Xia, just as the insurer in Moratti did.

The stream of communication included sending copies of the pleadings to

ProBuilders, notice of a potential settlement, and notice of the reasonableness

hearing once settlement was achieved. We simply cannot envision what more




       103 Jd,

       104 Jd, at 913, 914.

       105 Jd, at 914 (emphasis added).


                                            28
No. 71951-3-1/29



could have been done to get the insurer to withdraw its statement of position in

the January 2008 letter and participate in the settlement.

       In sum, the lack of the named insured formally tendering defense after

filing of the lawsuit did not relieve ProBuilders of its duty to defend.

       Xia also claims that the "selective tender" is inapplicable to this case. We

conclude that a genuine issue of material fact exists with respect to this

argument.

       The supreme court explained the selective tender rule in Mutual of

Enumclaw Insurance Co. v. USF Insurance Company.106 The "selective tender"

rule stands for the proposition that when an insured has not tendered a claim to

an insurer, the insurer is excused from its duty to contribute to a settlement of the

claim.107 This rule "preserves the insured's right to invoke or not to invoke the

terms of its insurance contracts," as "[a]n insured may choose not to tender a

claim to its insurer for a variety of reasons."108 The supreme court relied on

Casualty Indemnity Exchange Insurance Co. v. Liberty National Fire Insurance

Co. for these principles.109 In that case, the court applied the select tender rule

because equity dictated it based on the circumstances.110 With respect to the




       106164 Wn.2d 411,421, 191 P.3d 866 (2008).

       107 Jd,

       108 Jd, at 421-22.

       109 902 F. Supp. 1235 (D. Mont. 1995).

       110 Jd, at 1239.


                                              29
No. 71951-3-1/30



facts of this case, it is highly implausible that the select tender rule is applicable,

given the communications between the parties.

       ProBuilders argues that the named insured's intent not to tender the suit to

ProBuilders is evidenced by the fact that it formally tendered the suit to another

insurance company. The intent of the named insured is clearly a material factual

question.

       It is true that this name insured sent a formal tender letter to another

insurance company for Xia's claim. But this letter was sent after ProBuilders

plainly stated that it would not defend against the claim. Thus, on this record, we

believe it likely that any reasonable finder of fact would decide that the tender to

another insurer was a decision to try to obtain insurance coverage from

somewhere, given the express refusal of ProBuilders to provide coverage.

       In short, there was, at least, a genuine issue of material fact of the intent

of the named insured in tendering the defense elsewhere.

       Nevertheless, to the extent the trial court granted summary judgment on

this basis, its ruling was harmless. That is because the pollution exclusion

applied to bar coverage.

                                      BAD FAITH


       Xia argues that ProBuilders breached its common law duty of good faith.

Specifically, she contends the insurer's reading of the policy was done in bad

faith.111 We disagree.




       111 Brief of Appellant at 40-46.


                                              30
No. 71951-3-1/31



       "[A]n insurer has a duty of good faith to its policyholder and violation of

that duty may give rise to a tort action for bad faith."112 "An insurer acts in bad

faith if its breach of the duty to defend was unreasonable, frivolous, or

unfounded."113 "An insurer may not refuse to defend based upon an equivocal

interpretation of case law to give itself the benefit of the doubt rather than its

insured."114 A party's refusal to defend based on an arguable interpretation of

the policy is bad faith.115 But "[w]hen an insurer correctly denies a duty to

defend, there can be no bad faith claim based on that denial."116

       Here, as we discussed earlier in this opinion, ProBuilders correctly

determined that it had no duty to defend based on the pollution exclusion.

Summary judgement dismissing this common law claim was proper on this basis.

Accordingly, there can be no bad faith claim on the basis of the refusal based on

the pollution exclusion.

                               CPA & IFCA CLAIMS


       Xia next argues that summary dismissal of its statutory claims against

ProBuilders under the Consumer Protection Act (CPA) and the Insurance Fair

Conduct Act (IFCA) was improper. We agree.




       112 Smith, 150Wn.2dat484.

       113 Am. Best Food Inc.. 168 Wn.2d at 412.

       114 Jd, at 414.

       115 Jd,

       116 United Servs. Auto. Ass'n. v. Speed. 179 Wn. App. 184, 203, 317 P.3d
532, review denied. 180 Wn.2d 1015 (2014).


                                              31
No. 71951-3-1/32



       These statutory claims are separate from the common law claim. Xia's

CPA claim appears to be premised on the alleged violation of certain insurance

regulations. These regulations also provide the basis for Xia's IFCA claims.

There are genuine issues of material fact whether ProBuilders violated these

regulations.

       Xia argues that ProBuilders acted unreasonably in denying a claim for

coverage or payment of benefits under IFCA, RCW 48.30.015(2). Xia also relies

on two insurance regulations, WAC 284-30-330(4) and WAC 284-30-370, to

argue that ProBuilders had a duty to conduct a reasonable investigation before

denying coverage. WAC 284-30-330(4) provides that refusing to pay claims

"without conducting a reasonable investigation" constitutes an unfair or deceptive

act of the insurer. WAC 284-30-370 provides standards for a prompt

investigation of a claim, including that an insurer must complete its investigation

within 30 days unless the investigation cannot reasonably be completed within

that time. Under RCW 48.30.015(5), a violation of either of those regulations

constitutes a violation for purposes of RCW 48.30.015(2).

       Xia argues that, at a minimum, this court should remand to a jury to

determine whether ProBuilders acted unreasonably in its investigation and

whether it timely communicated with its insured. ProBuilders argues that this

court should decline to consider Xia's arguments based on IFCA because they

are raised for the first time on appeal. ProBuilders asserts that Xia's summary

judgment argument was limited to a claim for bad faith breach of the duties to

defend and indemnify and were not based on IFCA.



                                            32
No. 71951-3-1/33


      But Xia's complaint alleged violations of the CPA and IFCA, and in doing

so, it specifically cited WAC 284-30-330 and WAC 284-30-370. Further, Xia

expressly referenced these insurance violations in her response brief in

opposition to ProBuilders' motion for summary judgment. Accordingly, we

conclude that these arguments were preserved for appeal.

      We also conclude that there are genuine issues of material fact with

respect to these issues. Specifically, the record shows that there are genuine

issues of material fact about the reasonableness and promptness of ProBuilders'

investigation. Summary judgment on the CPA and IFCA claims was improper.

                                ATTORNEY FEES


      Xia argues that she is entitled to attorney fees in the trial court and on

appeal on both statutory and equitable grounds. We hold that she is not entitled

to fees under Olympic Steamship Co. Inc. v. Centennial Insurance Co.117

Determination of whether she is entitled to fees based on her statutory claims is

premature.

      Attorney fees may be awarded to a litigant when authorized by contract,

statute, or a recognized ground of equity.118 Xia first requests fees as a

prevailing party under the CPA, RCW 19.86.090, and under IFCA, RCW

48.30.015(1), (3). Both of these statutes provide for an award of fees to the

prevailing party. Because these claims are not yet properly adjudicated, a

prevailing party has not yet been determined. The request is premature.


       117117Wn.2d37, 811 P.2d 673 (1991).

       118 Durland v. San Juan County. 182 Wn.2d 55, 76, 340 P.3d 191 (2014).


                                            33
No. 71951-3-1/34



       Xia also requests fees under Olympic Steamship. Under that case "an

award of fees is required in any legal action where the insurer compels the

insured to assume the burden of legal action, to obtain the full benefit of [the]

insurance contract. . . ."119 Because Xia is not the prevailing party on the duty to

defend claim, she is not entitled to fees based on that case.

       Finally, Xia requests fees "under the equitable rule for the 'bad faith

conduct of the losing party.'" This also requires Xia to be the prevailing party.

       We decline to award Xia fees on any of the grounds she asserts. That is

without prejudice to her right to seek fees on remand for those matters remanded

to the court for further proceedings.

       We affirm the grant of summary judgment to ProBuilders on the alternative

basis that there was no duty to defend because of the pollution exclusion. We

reverse the dismissal of the Consumer Protection Act claim and the Insurance

Fair Conduct Act claim. The request for an award of attorney fees based on the

two statutory claims is premature. There is no basis for an award of fees based

on Olympic Steamship. We remand for further proceedings.



                                                           4ar,J
WE CONCUR:




 \/)tir^-^^ C. J w
       119 Olympic Steamship, 117 Wn.2d at 53.


                                             34
