Archive - Insurance Practice

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April 2, 2015

Policy Language is Construed Strictly Against an Insurer

The Court of Appeals has again made it clear that in Washington, policy language will be construed literally where an insurer attempts to exclude or limit coverage, but liberally where the policy describes coverage.

In Patriot General Insurance Co. v. Gutierrez, a Spanish-speaking resident of Walla Walla County applied for car insurance for his family of four, relying on the insurer’s representative to translate for him. Although he recalled disclosing his teenaged children to the agent, he signed a certification that he had listed all persons over 14 years old who lived with him and all persons who drove the vehicles to be insured. However, the application only listed himself and his wife.

The insurer issued a policy, naming the applicant and his wife as covered persons. It included an underinsured motorist insuring agreement, which would cover the named insured, the spouse, and any “relative,” defined as “a person living in your household related to you by blood, marriage, or adoption.” The policy stated that any relative over the age of 14 needed to be identified in the application prior to a loss. The policy also provided that it had been issued in reliance upon the statements in the application, and that if any of the statements were false, the policy may not provide coverage.

The policyholder’s 19-year-old son was then involved in a single-car rollover accident, and the driver of the car was underinsured. The policyholder tendered the claim to the insurer under the underinsured motorist coverage. The insurer denied the claim because the policyholder had failed to disclose his son in the application. The insurer then initiated a declaratory judgment action, seeking a declaration that it would not have a duty to pay the underinsured motorist claim.

The insurer moved for summary judgment contending the failure to disclose the son in the application precluded underinsured motorist coverage. The policyholder countered that (a) the policy did not expressly exclude any family member over 14 not listed in the application; and (b) the more inclusive statutory definition of “insured” under RCW 48.22.005 should replace the “insured person” definition in the policy. The trial court granted summary judgment to the non-moving party, the policyholder, based on the undisputed facts.

The Court of Appeals, Division III, affirmed summary judgment based on the language in the policy. The analysis began with “familiar principles of insurance policy construction.” These include the complimentary rules that, on the one hand, the insuring agreement is read broadly to find coverage whenever possible, while on the other hand, exclusionary language is strictly construed and applied.

The Court of Appeals pointed out that the insurer could have, but did not, draft the policy to expressly exclude from coverage members of the household that had not been disclosed in the application. Additionally, the insurer could have, but did not, include mandatory language in the provision regarding false statements in the application and loss of coverage.

The Court of Appeals also found it significant that the insurer had no evidence to support a determination that the policyholder made a knowingly false statement in the application, and no evidence that including the two children in the application would have changed the premium. The Court declined to reach the argument that any statutory language should be read into the policy to replace existing language.

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June 4, 2014

Court limits insurer’s malpractice claim against defense lawyer

An insurer may not pursue a malpractice claim against appointed defense counsel based on the failure to assert defenses desired by the insurer, unless the insurer can show it was an intended beneficiary of the legal services, the Washington Supreme Court held in Stewart Title Guar. Co. v. Sterling Savings Bank, et al.,178 Wn.2d 561 (2013).

Sterling Savings Bank loaned a borrower money to purchase development property. As a condition for the loan, Sterling required a first priority security interest in the property. Sterling’s title insurer, Stewart Title Guaranty Company, failed to discover that Mountain West Construction had begun construction on the property and held a statutory lien superior to the bank’s security interest. A payment dispute ultimately arose and Mountain West initiated foreclosure proceedings.  In response, Stewart Title hired the Witherspoon Kelley law firm to defend Sterling in the foreclosure action.

Witherspoon did not raise an equitable subrogation defense in the foreclosure action, stipulating that Mountain West had first priority in an effort to obtain a swift settlement with the builder. Stewart Title fired Witherspoon over disagreements regarding the viability of an equitable subrogation defense. Stewart Title hired new counsel who argued differently than Witherspoon, but the trial court held that Sterling was bound by the stipulation, and refused to consider the newly asserted equitable subrogation claim.

Stewart Title then sued Witherspoon for legal malpractice based on the firm’s failure to raise equitable subrogation as a defense for Sterling. Witherspoon argued that: (1) its client was Sterling, not Stewart Title, and that its failure to raise defenses specified by Stewart Title would not serve as the basis for a legal malpractice lawsuit; and (2) an equitable subrogation defense would have failed under the facts of the case.

The trial court concluded that Stewart Title was an intended beneficiary of the representation based in part on finding a contractual duty to inform Stewart Title regarding the representation and in part on the alignment of interests between Witherspoon and Stewart Title.  However, the trial court granted summary judgment because it concluded an equitable subrogation defense would not have succeeded under the circumstances.  Stewart Title appealed and the Supreme Court accepted review of both the duty issue and the equitable subrogation issue.

Relying on the six factors described in Trask v. Butler, 123 Wn.2d 835 (1994), to evaluate the parties’ relationship, the Washington Supreme Court held that Witherspoon’s only client was Sterling, and that Stewart Title was a non-client, third-party payor. The Court emphasized that the “primary inquiry” in determining the existence of a duty of care “is whether the plaintiff is an intended beneficiary of the transaction to which the advice pertained,” and that “no further inquiry need be made unless such an intent exists.”

The Supreme Court disagreed with the trial court’s conclusion that Stewart Title was an intended beneficiary of Witherspoon’s representation of Sterling because: (1) finding a duty based merely on “aligning interests” would undermine the Trask holding and potentially create an ethical dilemma for appointed counsel. It rejected Stewart Title’s argument that a nonclient insurer is presumed to be an intended beneficiary unless there is an actual conflict of interest between an insurer and its insured.

The Court found the simple fact that some aligning interests existed between Stewart Title and its policyholder did not show that either Witherspoon or Sterling Bank intended Stewart Title to have the benefit of  Witherspoon’s  representation. It concluded this was demonstrated by Witherspoon’s strategy of seeking a speedy, yet just, settlement in contrast with Stewart Title’s desire to assert an equitable subrogation defense. The Court further held that a contrary conclusion could cause legal counsel to violate the ethical requirements of Rule of Professional Conduct 5.4(c).

The Supreme Court concluded that Witherspoon’s contractual duty to inform Stewart Title about its conduct of Sterling’s defense was  insufficient to establish a duty of care, because: (1) attorneys who accept a duty to inform a nonclient third-party payor about legal matters, do not presumptively intend to benefit that third party; and (2) attorneys cannot contract away, or have their professional legal judgment be directed or regulated by a third-party payor of these services.

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November 4, 2013

Washington Presumes Insurers have no Attorney-Client Privilege in Bad-Faith Litigation

by A. Janay Ferguson

In first-party bad-faith lawsuits against insurers, there is a presumption that the attorney-client privilege does not apply to the insurer’s attorneys, the Washington Supreme Court has held.  In Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 295 P.3d 239 (2013), the Court determined that insurers must show “that [an] attorney was providing counsel to the insurer” and not engaged in the quasi-fiduciary function of claims-handling before the attorney-client privilege will attach.

In Cedell, the second story of the insured plaintiff’s house was destroyed by fire while he was away from home.  The estimated value of the damage was about $70,000 for the house and $35,000 for its contents.

The insured’s girlfriend was present at the house and stated she believed the fire had been started by a candle.  Also, the girlfriend, who was not an insured, admitted that she and others at the house might have used methamphetamine on the day of the fire.  The insured, Cedell, denied using methamphetamine and any knowledge that his girlfriend had done so that day.  The fire department concluded that the fire was “likely” accidental based on the girlfriend’s report concerning the candle.

The insurer retained an attorney to assist it with making a coverage determination.  The insurer’s attorney examined Cedell and his girlfriend under oath.  In July 2007, the attorney sent Cedell a letter stating that the origin of the fire was unknown and that the insurer might deny coverage based on a delay in reporting and the girlfriend and Cedell’s inconsistent statements about the fire.  The letter extended to Cedell a one-time offer of $30,000,  good for 10 days.  Cedell tried unsuccessfully to contact the insurer about the offer during the 10 days, but no one returned his call.

A year later, when the claim had still not been paid, Cedell sued the insurer and demanded production of the underwriting claim file.  The insurer produced a heavily redacted file, asserting that the redacted information was not relevant or was privileged.  The insurer also declined to answer interrogatories based on the ground of attorney-client privilege, including Cedell’s question regarding why it had given him “10 days to either accept or reject the [$30,000] offer.”

The trial court found adequate non-privileged evidence to support a good faith belief that the insurer had acted in bad faith, which was sufficient to invoke the fraud exception to the privilege.  It then ordered an in-camera review, and concluded that, on a bad faith claim, the insured is entitled to discover the entire claim file, including privileged and work product material.  The Court of Appeals granted discretionary review, and later reversed.

The Supreme Court’s analysis of the attorney-client privilege began from the conclusion that the insured needs access to the insurer’s file to discover facts supporting a claim of bad faith and permitting insurers to assert a blanket privilege would unreasonably obstruct discovery.  The Court recognized an exception for UIM claims because in that context, insurers are entitled to counsel’s advice in strategizing the same defenses that the tortfeasor could have asserted.

Acknowledging the privilege would still apply when an insurer’s attorneys were providing advice regarding the insurer’s potential liability, the Cedell Court held that in first party insurance claims by insureds claiming bad faith in the handling and processing of claims, other than UIM claims, there is a presumption of no attorney-client privilege.  The insurer may assert an attorney-client privilege by showing in camera that the attorney was providing counsel to the insurer.  Upon such a showing, the insured may still be entitled to pierce the attorney-client privilege by asserting the civil-fraud exception.

Once the civil-fraud exception is asserted, the superior court must engage in a two-step process.  First, upon a showing that a reasonable person would have a reasonable belief that an act of bad faith has occurred, the trial court will perform an in camera review of the claimed privileged materials.  Second, after in camera review and upon a finding there is a foundation to permit a claim of bad faith to proceed, the attorney-client privilege shall be deemed to be waived.

Under the facts of Cedell’s case, the Supreme Court concluded the attorney did not share a privilege with the insurer because he assisted in the investigation of Cedell’s claim by taking sworn statements and corresponding with Cedell.  The Court found the attorney negotiated with the insured on the insurer’s behalf by sending the offer letter.  Accordingly, the burden was on the insurer to show the attorney’s communications were privileged and not discoverable under the civil-fraud exception.

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April 8, 2013

Insurer Must Show Actual Prejudice from Noncooperation

By Gregory P. Turner

Substantial compliance satisfies an insured’s duty to cooperate with an insurer.

An insurer may deny insurance coverage for noncooperation only when it can prove that the insured’s actions resulted in actual prejudice to the insurer.  Additionally, an insurer may require that an insured submit to an examination under oath (EUO) only when it is reasonable and material to the insurer’s claim investigation.

In Staples v. Allstate Ins. Co., 295 P.3d 201 (Wash. 2013), a Ford van belonging to the insured, Staples, was stolen from a parking lot in Redmond, Washington during August 2008.  Staples stored a large collection of tools in the back of the van.

Staples reported the theft to the police, telling them the tools were worth around $15,000.  The police report described the van as a “work truck” and identified the tools as being related to a “mobile workshop for the business that Staples contracted with.”

Two weeks later, Staples submitted a claim for loss to Allstate under his homeowner’s policy. Staples’s claim with Allstate calculated the worth of the tools as $20,000-25,000.  The tools were described as being for Staples’s personal use although they “could be” used for work.

Allstate transferred the claim to its special investigation unit.  Allstate requested documents from Staples, including proof of ownership, a sworn statement in proof of loss, an authorization to release information, and three years of tax returns. Allstate took two recorded statements from Staples, neither of which was under oath.

Over the next few months, Staples failed to provide the requested documentation despite several written requests from Allstate. It was not until December 11, 2008, nearly three months after the loss, that Staples submitted his sworn statement in proof of loss and authorization to release information.

On January 15, 2009, Allstate requested by letter that Staples appear for an EUO on January 29, also requesting documentation related to the loss by the following day, January 16. On January 23, Allstate sent a letter to Staples stating that his EUO was canceled because he had not produced the requested documentation. This letter was mailed on the same day as a letter from an attorney Staples had recently hired, who informed Allstate that Staples could not attend an EUO on January 29.

Allstate initially set a deadline of March 31, 2009, for Staples to produce documents and reschedule the EUO, but eventually extended this deadline to April 15. When Staples did not attempt to reschedule, Allstate denied his claim on April 30, 2009. The parties dispute whether Staples provided the documents Allstate requested, but it appears Staples provided documents substantiating the value of his stolen tools.  Three and a half months later Staples offered to appear for an EUO if Allstate would agree to extend the contractual time limit for filing suit.  Allstate declined.

Staples filed suit against Allstate for breach of contract, bad faith, and violation of IFCA.  Allstate moved for summary judgment, which was granted.  The Court of Appeals affirmed in an unpublished opinion.

The Supreme Court accepted review and reversed, finding material questions of fact on three issues.

First, the Court concluded that it was a matter of first impression whether an insurer’s request for an EUO be reasonable or material. Even though the Allstate policy required the insured to submit to an EUO the court determined, based upon the “quasi-fiduciary nature of the insurance relationship” that the insurer could only demand an EUO if it was reasonable and material to its investigation.  This presented a question of fact for the jury.

Second, the Court questioned whether Staples had substantially complied with Allstate’s request by providing some of the documentation and submitting to a recorded statement.  His substantial compliance also presented a factual issue for trial.

Lastly, the Court rejected Allstate’s position that an EUO is a valid condition precedent to bringing suit. Instead, the Court concluded an insurer must prove actual prejudice before denying a claim for failure to cooperate.  A claim of actual prejudice requires affirmative proof of advantage lost or disadvantage suffered as a result of the failure to cooperate.  Prejudice is an issue of fact that will seldom be established as a matter of law.

In summary, an insurer may only demand an EUO when it is reasonable and material to its investigation.  If an insurer denies a claim for failure to cooperate, it must be prepared to prove that the insured did not substantially comply with its request and that the insured’s actions resulted in actual prejudice to the insurer.  These are issues that will rarely, if ever, be decided on summary judgment.

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Insurers Have No Right to a Jury Trial on the Reasonableness of a Covenant Judgment

By Marc Rosenberg

RCW 4.22.060 creates an equitable proceeding that did not exist when the Washington Constitution was adopted.

An insurer has no constitutional right to determine the reasonableness of a consent judgment against its insured, the Washington Supreme Court has held.  Article I, section 21 of the Washington Constitution does not entitle an insurer to have the reasonableness of a covenant judgment determined by a jury because: (1) RCW 4.22.060 creates an equitable proceeding; (2) a reasonable covenant judgment establishes the presumptive measure of damages against the insured in a subsequent bad faith action; and (3) a reasonableness hearing, without the chance to retry the issue, does not violate due process.

In Bird v. Best Plumbing Group, LLC, 175 Wn. 2d 756, 287 P.3d 551 (2012), the initial plaintiff was a landowner who alleged personal injury and property damage when a sudden burst of sewage erupted from the ground when he returned home from work.  The sewage burst was caused by an employee of Best Plumbing Group LLC, who entered plaintiff’s property without permission to repair a sewer line and cut a pressurized sewage pipe in three places. The sewer pump cycled at the moment plaintiff passed the area cut by Best.

Over the course of eight months, sewage continued to escape from the pipe with every pump cycle. Bird alleged the sewage flow caused dangerous hillside instability on his property, as well as extensive damage to his residence in the form of toxic mold from moisture and sewage intrusion.  Eventually, he brought an action against the plumbing contractor for trespass and negligence. The plaintiff’s homeowner’s insurer also brought an action against the contractor for subrogation. The two actions were consolidated.

After the contractor’s liability insurer denied a demand for the $2 million policy limits, the contractor’s owner and the plaintiff reached a settlement agreement for $3.75 million.  The Superior Court determined that the settlement was reasonable. The contractor’s insurer appealed, and the Court of Appeals affirmed. The insurer petitioned for review and argued that it was entitled to a jury trial to determine the reasonableness of the settlement.

The primary issue before the Supreme Court was whether an insurer has a constitutional right to a jury trial on the reasonableness of a covenant judgment between an insured defendant and a plaintiff under RCW 4.22.060.  The Court concluded insurers have no right to a jury trial on the reasonableness of a covenant judgment and, further, no right to contest the amount of the judgment in any later trial based on the insurer’s alleged bad faith.

To reach this conclusion, the Court first considered the nature of the covenant judgments under the statute.  RCW 4.22.060 was enacted as part of the tort reform act in 1981 to provide a means for allocating liability among joint tortfeasors.  Originally, a trial court would determine whether a settlement amount between a tort victim and fewer than all tortfeasors was reasonable, so that a nonsettling tortfeasor could offset that exact amount from a damages award at trial.  Although the insurer argued that RCW 4.22.060 should only apply to contribution.  The Court disagreed.

The Court determined that Washington has long interpreted article I, section 21 of the Washington Constitution as guaranteeing a right to trial by jury for causes of action that existed at the time of the Constitution’s adoption in 1889.  The Court stated that RCW 4.22.060(1) creates an equitable proceeding because the language of the statute establishes that the reasonableness determination must be made by the trial judge, not a jury.  The Court therefore reasoned that, since RCW 4.22.060(1) is an equitable statutory proceeding that did not exist at the time of the Constitution’s adoption, an insurer is not entitled to a jury trial for such a determination.

Stating that there is little difference between a determination of reasonableness in the context of the contribution statute and a covenant judgment, the Court concluded that an insurer “does not have a right under article I, section 21 of our constitution to a jury determination of reasonableness either at the reasonableness hearing or the subsequent bad faith action.”   The Court held that, since due process is satisfied by notice and an opportunity to intervene in the underlying action, an insurer is not denied due process where it has notice of a reasonableness hearing and a chance to intervene and argue its position.

Finally, although the insurer contended that the superior court misapplied the treble damages provision of the trespass statute, RCW 4.24.630, the Court affirmed.  It found the superior court did not abuse its discretion because it considered the issue on the record and discussed its reasons for affirming the $ 3.7 million settlement amount as reasonable.

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The Efficient Proximate Cause Rule Does Not Exclude Perils

By Steven G. Wraith

Washington construes insurance policies to favor coverage.

The Washington Supreme Court recently clarified the efficient proximate cause rule, concluding that when an excluded peril sets in motion a causal chain that includes covered perils, the efficient proximate cause rule does not mandate exclusion of the loss.

In Vision One, LLC; et al. v. Philadelphia Indemnity Insurance Company, 174 Wn. 2d 501, 276 P.3d 300 (2012), the insured (Vision) was developing a condominium project in downtown Tacoma. Vision retained a company to pour concrete for the building, which in its turn subcontracted with a scaffolding company to supply the shoring that would temporarily support the poured concrete slabs.  After the shoring installation was completed, the concrete subcontractor began pouring concrete for the first floor, but soon after finishing the first section of the floor, the shoring gave way.  Framing, rebar, and newly poured concrete collapsed onto the lower parking level where the wet concrete hardened.  Several weeks were required to clean up the debris, repair the damage, and reconstruct the collapsed floor.

Vision submitted a claim under its all-risk coverage insurance policy. The policy required the insurer to pay for direct losses caused by or resulting from any of the covered causes of loss. Collapse was not an excluded peril under the policy. Losses caused by or resulting from deficient design or faulty workmanship were excluded. The policy specified that the insurer would not pay for loss or damage caused by any excluded event.  A loss could be “caused by” an excluded event if the event “initiate[d] a sequence of events that resulted in loss or damage, regardless of the nature of any intermediate or final event in that sequence.” The policy included an ensuing loss clause that covered damages resulting from faulty workmanship if they were caused by an otherwise covered event.

The insurer retained an engineering firm to investigate the cause of the collapse and was informed the collapse was “more likely than not” the result of a marginal shoring design and several problems with shoring installation. The insurer denied the claim because the loss was caused by defective design and faulty workmanship. However, the insurer’s denial letter did not assert that the loss was excluded because of a defective design that had caused a series of events, some covered and some uncovered, to result in the loss.

Vision claimed the collapse was caused by faulty equipment, which would have been a covered peril under the policy. Vision further claimed that if an excluded peril and a covered peril both contributed to the property damage, then the policy would cover the loss. The insurer disagreed, arguing that in such a case, coverage would be present only if the covered peril was the efficient proximate cause of the loss. Vision sued and prevailed after a jury trial.

On appeal, the Court of Appeals accepted the insurer’s argument that the resulting loss clause applied only if the efficient proximate cause of the loss was a covered loss.  If the efficient proximate cause of the loss was defective design, an excluded peril without an ensuing loss clause, the insurer had properly denied coverage. It remanded the case back to a jury for a finding of the efficient proximate cause of the loss.

The Supreme Court disagreed and reinstated the trial verdict.  The Court first reaffirmed the principle of interpretation that holds insurance policies should be construed in favor of coverage.  After discussing the nature of the policy at issue, the Court determined that the efficient proximate cause rule could not be used as a basis to deny coverage.

The efficient proximate cause rule applies when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss. In that event, the loss is a covered loss.  The opposite proposition is not true. When an excluded peril sets in motion a causal chain that includes covered perils, the efficient proximate cause rule does not mandate exclusion of the loss because the rule may only operate in favor of coverage not exclusion. The Court left open the possibility that an insurer might draft policy language denying coverage when an excluded peril initiates an unbroken causal chain, but stated that not only the excluded peril, but also the causal chain arising from the excluded peril, must be asserted as the insurer’s basis for denying coverage.

The Court concluded that the insurer’s denial letter to Vision referenced only an exclusion based on loss or damage caused by the excluded event rather than the sequence of events initiated by an excluded event. Although the sequence of events might have justified exclusion, the insurer’s failure to invoke this provision in its denial letter prevented it from arguing against coverage at trial on the basis that an excluded peril, defective design, had initiated a sequence of events resulting in loss or damage.

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April 5, 2013

Insurance Fair Conduct Act

Jeffrey P. Downer, A. Janay Ferguson, and David M. Norman obtained summary judgment of dismissal of plaintiff’s claim under the Insurance Fair Conduct Act (IFCA), in Collins v. Insurer, an insurer bad faith case.  Relying on the plain language of the statute and federal precedent, Jeff, Janay, and David argued that the IFCA claim was barred because the insurer had defended and paid all damages in a third-party litigation against its insured.  The superior court agreed and dismissed plaintiff’s IFCA claim with prejudice.

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Arbitration of Personal Injury Lawsuit

Steven G. Wraith and Dirk J. Muse won a complete defense verdict and an award on their client’s counterclaim in LaPlante v. Stentz, et al., an arbitration of a personal injury lawsuit in Spokane County.  After a full arbitration, the arbitrator concluded the plaintiff had not carried his burden of proof, but Steven and Dirk’s client had.  The arbitrator dismissed the plaintiff’s claims and awarded roughly $3,700 to the defendant.

Lee Smart attorneys have extensive experience in the Areas of Practice shown to the right. Click on one to learn more about our expertise and our attorneys in that practice.

Insurance Coverage and Bad Faith Action

Steven G. Wraith and Pamela J. DeVet won a motion to exclude the policyholder’s expert witness testimony and damages evidence in Reed Construction, Inc. v. James River Insurance Co., an insurance coverage and bad faith action in the U.S. District Court for the Western District of Washington.  Building on this ruling, Steve and Pam obtained summary judgment in favor of their client based on the policyholder’s failure to present evidence to support the essential element of damages.

Lee Smart attorneys have extensive experience in the Areas of Practice shown to the right. Click on one to learn more about our expertise and our attorneys in that practice.

CPA and IFCA Claim

Michael W. Brown and Michael P. Ryan obtained a voluntary dismissal with prejudice of an insurance bad faith, breach of contract, negligence, CPA and IFCA claim after filing their motion for summary judgment. In EYOB Michael v. IDS Property Casualty Ins., plaintiff filed an insurance bad faith action before trial on the underlying claim. After a jury trial, the plaintiff was awarded less than the amount he received in settlement from the third-party tortfeasor, but the plaintiff continued to pursue his bad faith claims. Once he received the summary judgment motion, the plaintiff voluntarily dismissed all claims with prejudice. … August G. Cifelli and Jonathan M. Minear won the appeal of their client’s personal injury suit in Blue v. Foster. Gus and Jon’s client sustained serious injuries on a stairway while at her former employer’s premises to feed his dog. The Court of Appeals concluded that the trial court had erred in dismissing the plaintiff’s case because issues of material fact regarding her status as an invitee or licensee precluded summary judgment.

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