Insurer's denial of defense based on unsettled law was bad faith

By Stephanie L. Peppard

A liability insurer may be liable for bad faith if it relies on a split in legal authority in refusing to defend a policyholder, the Washington Supreme Court has held.

In American Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398 (Mar. 18, 2010), American Best Food operated the Cafe Arizona nightclub. Two bar patrons, George Antonio and Michael Dorsey, became involved in an altercation. Security guards escorted Antonio out of the building but later let him return to the bar. He confronted Dorsey again. This time, security escorted both men outside. Antonio then pulled a gun and shot Dorsey. Dorsey struggled to the alcove of the bar, and security guards took him back inside. The club’s owner ordered the security guards to remove Dorsey from the club, and according to Dorsey, they “dumped him on the sidewalk.”

Dorsey later sued Cafe Arizona, alleging that it failed to protect him against criminal conduct, despite the club’s history of violence and its awareness of Antonio's propensities. He alleged that the security personnel worsened his injuries by dumping him on the sidewalk after he had been shot.

Cafe Arizona tendered the defense of the action to its insurer, Alea London, Ltd. The insured’s counsel and Alea exchanged letters that argued over whether the policy exclusion for injuries “arising out of” assault or battery applied, even though the complaint alleged additional injuries that the insured’s negligence had caused after the assault had occurred. Alea asserted that under more than 20 years of Washington case law, the phrase “arising out of” broadens the exclusion and encompasses any occurrence with a causal connection to the excluded assault and battery. According to Alea, but for the excluded assault, Dorsey would have no negligence claim. Cafe Arizona cited a federal decision from Texas in which a tavern owner’s failure to render aid to an injured patron was covered despite a similar assault-and-battery exclusion in the policy.

Cafe Arizona sued Alea for breach of contract, bad faith, and violation of the Washington Consumer Protection Act (CPA). On cross-motions for summary judgment, the trial court dismissed the action. Cafe Arizona appealed. The Court of Appeals reversed in part, holding that Alea had breached its duty to defend and that the trial court should not have dismissed the bad-faith claim on summary judgment. The Court of Appeals affirmed the dismissal of Cafe Arizona’s CPA claim. Alea sought review by the Washington Supreme Court, which accepted review.