General liability insurers in Washington and elsewhere continue to issue "blanket" additional insured endorsements to construction contractors and material suppliers. The decision last week in Tim Ryan Construction, Inc. v. Burlington Ins. Co., 2012 U.S. Dist. LEXIS 178993 (.pdf), illustrates just how much trouble these endorsements can lead to if a liability insurer is not careful. 

The lawsuit stemmed from a poorly built office building for which the owner (Tim Ryan Development) had used an affiliated company (Tim Ryan Construction) to run the project as the general contractor. When widespread leaks were discovered, the owner essentially sued himself (using the legal fiction allowed by the existence of two separate companies and a supposed general contract between them) and then sought coverage from, among places, the insurers for subcontractors. Burlington Insurance refused to defend and the general contractor sued for breach of the duty to defend, bad faith and IFCA violations. Less than four months into the bad faith lawsuit, Judge Benjamin Settle granted summary judgment against Burlington, finding that it had breached its duty to defend and was also liable for bad faith and IFCA violations. While Burlington was probably right in its belief that the water damage predated its policy and, therefore, was not covered, Burlington had relied upon disputed extrinsic evidence in violation of Washington's broad duty to defend standard. Burlington now faces possible "coverage by estoppel" and could end up paying significant amounts (including treble damages) that may well exceed its policy limits. Had Burlington defended under reservation of rights, things could have turned out far better for the insurer.