HNRK Coverage Corner

This week on Coverage Corner, we revisit Adolph v. General Casualty Company of Wisconsin, a coverage action in the United State District Court for the Western District of Washington, that we previously covered here. In a decision issued on April 15, 2026, the court granted plaintiffs’ motion for reconsideration and clarified the consequences of an insurer’s denial of coverage based on an unreasonable interpretation of policy language.

Background: The Prior Summary Judgment Order

In its original summary judgment order, the Court held that the insurer, RSUI, had breached its duty to defend when it denied coverage based on late notice and the policy’s prior acts exclusion.

First, applying Washington’s “late tender rule,” the Court explained that an insurer cannot deny coverage solely based on late notice, without a showing of “actual and substantial prejudice,” which RSUI was unable show.

Second, the Court held that there was at least a possibility that the prior acts exclusion did not apply to the conduct alleged in the underlying litigation, and the possibility of coverage was alone sufficient to trigger RSUI’s duty to defend.

Despite these holdings, the Court denied summary judgment on the plaintiffs’ common law and statutory causes of action for bad-faith claims handling against RSUI. The Court reasoned that the plaintiffs had not shown that RSUI acted unreasonably, concluding that an erroneous interpretation of policy language, standing alone, was insufficient to establish bad faith as a matter of law.

On Reconsideration: Bad Faith as a Matter of Law

On reconsideration, the District Court reversed itself and granted summary judgment to the plaintiffs on their bad faith claims.

In support of their motion for reconsideration, the plaintiffs relied on the Washington Supreme Court’s decision in American Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 413 (2010), which held:

It cannot be said that the insurer did not put its own interest ahead of its insured when it denied a defense based on an arguable legal interpretation of its own policy. . . . [The insurer’s] failure to defend based upon a questionable interpretation of law was unreasonable and [it] acted in bad faith as a matter of law.

The District Court agreed that American Best Food was controlling and required awarding summary judgment to the plaintiffs.  The court concluded that RSUI “put its own interests ahead of its insured” by denying defense coverage based on “an arguable interpretation” of the policy and therefore acted in bad faith under Washington law.

This decision appropriately enforces the broad scope of the duty to defend, which is supposed to be triggered by any “possibility” of coverage.  Washington law gives some teeth to that standard.  An insurer cannot avoid a finding of bad faith by pointing to an “arguable” basis for denying a defense