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Fluke Corp. v. Hartford Accident & Indemnity Co.8/28/2000
In a California lawsuit, a jury found that Fluke Corporation had maliciously prosecuted a claim against a competitor. The court entered judgment for both punitive and compensatory damages. Fluke had commercial liability insurance through The Hartford Accident & Indemnity Company, insuring Fluke for those sums it became obligated to pay as damages because of injury arising out of malicious prosecution. We hold that the policy covers punitive damages as well as compensatory damages; that Washington, unlike California, has no public policy invalidating insurance coverage for punitive damages or for the intentional tort of malicious prosecution; and that Washington law applies because Washington has the most significant relationship with the insurance contract. Therefore, Fluke has coverage for the entire award.
Fluke Corporation, based in Everett, Washington, manufactures electrical equipment. In 1988, Fluke brought a patent infringement suit in federal court in California against a competitor, Talon Instruments, and Talon's president, Robert Corby. Fluke lost. Judgment was entered in December 1992 on the jury's verdict of non-infringement.
Talon and Corby sued Fluke in a California state court in November of 1993, alleging that Fluke had maliciously prosecuted the patent infringement claim in an attempt to force them out of business. Fluke tendered the claim to its insurer, Hartford. Fluke had general commercial liability insurance with Hartford, including a primary and an umbrella policy. Hartford agreed to defend Fluke in the lawsuit, but notified Fluke that California does not allow insurance coverage for intentional acts, including malicious prosecution, or for punitive damages. Fluke instituted the present suit against Hartford in Snohomish County Superior Court in July 1996, seeking a declaration of coverage. The parties agreed to stay the litigation in Washington until the entry of a final judgment in the malicious prosecution case.
The jury in California found in favor of Talon and Corby in the spring of 1997. The verdict awarded two million dollars in compensatory damages and four million dollars in punitive damages. Both Hartford and Fluke then moved for summary judgment in the declaratory action.
Choosing to apply Washington law, the trial court found no bar to Fluke's entitlement to coverage for the award of compensatory damages. As to punitive damages, however, the court construed the policy's insuring clause as providing no coverage. The court awarded Fluke its fees and costs under the rule of Olympic Steamship Co. Inc. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673 (1991). Fluke appeals from the ruling denying coverage for punitive damages. Hartford appeals from the ruling granting coverage for compensatory damages and from the award of fees.
1. Hartford agreed to cover both compensatory and punitive damages.
We begin with the contract. Hartford defends the trial court's construction of the policy as indemnifying Fluke for compensatory damages only, while Fluke contends the coverage includes punitive damages as well. Neither party suggests that the law of California should govern our analysis of this issue, so we apply Washington principles of contract construction. One basic principle is that where policy language is clear and unambiguous, the court must enforce it as written and may not modify it or create ambiguity where none exists. Allstate Ins. Co. v. Peasley, 131 Wn.2d 420, 424, 932 P.2d 1244 (1997).
Under Coverage B of the primary policy, 'Personal and Advertising Injury Liability', Hartford agreed to pay 'those sums that the insured becomes legally obligated to pay as damages be
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