The Court of Appeals of Washington, Division One.
Filed: December 11, 2006.
Counsel for Appellant/Cross-Respondent, Kim D. Stephens, Tousley Brain Stephens PLLC, 1700 7th Ave Ste 2200, Seattle, WA, 98101-1332.
Chase Christian Alvord, Tousley Brain Stephens PLLC, 1700 7th Ave Ste 2200, Seattle, WA, 98101-1332.
Max Eric Jacobs, Tousley Brain Stephens, 1700 7th Ave Ste 2200, Seattle, WA, 98101-1332.
Counsel for Respondent/Cross-Appellant, Thomas Lether, Cole Lether Wathen & Leid PC, 1000 2nd Ave Ste 1300, Seattle, WA, 98104-1082.
Eric Jay Neal, Cole Lether Wathen & Leid PC, 1000 2nd Ave Ste 1300, Seattle, WA, 98104-1082.
After water intrusion caused structural damage to The Bedford, a condominium building, Safeco Insurance Company denied coverage under its provisions for rainwater and collapse damage. The court and jury agreed with Safeco, and we affirm the coverage determinations. But the court improperly recognized a claim of attorney-client privilege for certain communications without knowing the contents of the documents. This requires we remand The Bedford's claim that Safeco acted in bad faith so that the court can conduct such review and any further proceedings as may be appropriate.
In July 2001, when the building was three years old, extensive water damage was discovered in the structure of The Bedford, a senior living community outside Vancouver, Washington. Damage investigators concluded that defective construction had allowed water to intrude into the building, and that the damage began to develop almost immediately after construction was completed.
The Bedford settled claims against the general contractor and the architect, and also settled with Agricultural Insurance Company, which insured the property from August 1999 until July 2001. Under its policy with Safeco Insurance Company, which insured the property during the first year after completion (July 1998 to July 1999), The Bedford sought to recover repair and business interruption damages under its coverage for rainwater intrusion and collapse.
Safeco denied coverage for water intrusion, because its own and Bedford's structural engineers attributed the damage to construction defects and decay, both of which are excluded perils under the policy.
Safeco hired Pacific Engineering Technologies (Pacific) to investigate the claim for collapse damages. The term "collapse" is not defined in the policy. Safeco directed Pacific to apply the definition of "imminent collapse." Using that definition, Pacific reported that no portion of the structure suffered collapse during Safeco's policy term. Safeco denied collapse coverage on this basis.
The Bedford sued Safeco for breach of contract, bad faith, and violation of the Consumer Protection Act, chapter 19.86 RCW.
On summary judgment, the court ruled that the legal standard for "collapse" is not "imminent collapse" but "substantial impairment of structural integrity." Clerk's Papers at 14. The parties stipulated to a technical definition of that standard from which their experts could testify. A dispute then arose about the meaning of the stipulated definition, with The Bedford contending it required a specific mathematical formula. The court refused to so hold, and allowed Safeco's engineers to testify to their calculations and conclusions.
The engineer who prepared Pacific's report, James Paustian, revealed on cross-examination that in an early analysis, he had concluded that collapse did occur during the policy period, but changed his analysis as directed by Pacific engineer and president Joseph Bozick. Bozick testified he made the decision to change the analysis based on the stipulated definition.
Paustian testified he e-mailed a draft report containing his first analysis to Safeco's counsel on December 10, 2003. Safeco had produced its entire Pacific file in discovery. The e-mail had been produced, but not the attachment. Safeco's counsel stated he had neither received nor read the draft report.
The court permitted The Bedford to examine Pacific's computer system to search for the draft, which was eventually located on a backup file stored offsite. Paustian had amended his report by overwriting the draft, and had retained no copies. The draft was found the penultimate day of trial. The Bedford was able to cross-examine Bozick, but did not otherwise have benefit of the draft.
At the close of The Bedford's case, the court directed a defense verdict on the claim for rainwater damage. Questions of collapse coverage, bad faith, and Consumer Protection Act violations went to the jury, which returned a verdict for Safeco. The Bedford's motion for post-trial relief was denied.
Rainwater Intrusion. A directed verdict is appropriate when, viewed most favorably to the nonmoving party, the evidence is insufficient as a matter of law to sustain a verdict for that party. CR 50; Wright v. Engum, 124 Wn.2d 343, 356, 878 P.2d 1198 (1994). Our review is de novo. Stiley v. Block, 130 Wn.2d 486, 504, 925 P.2d 194 (1996).
The Bedford's policy with Safeco is an all-risk policy providing coverage against all perils not specifically excluded or limited by the policy. Loss from rainwater intrusion is generally covered, but loss caused by faulty design, construction, or maintenance is specifically excluded. The Bedford concedes that construction defects caused the rainwater intrusion.
The Bedford contends it is nonetheless covered under the ensuing loss provision, which insures against damage resulting from covered losses even where the causal event is excluded. Here, the paragraph excluding construction defects concludes with the following provision: "But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage." Clerk's Papers at 174.
A resulting or ensuing loss provision is an exception to an exclusion, and preserves coverage where a covered loss is caused by an excluded peril. Wright v. Safeco Ins. Co. of Am., 124 Wn. App. 263, 274, 109 P.3d 1 (2004). Thus, in Wright v. Safeco, an ensuing loss exception preserved coverage for damage from water leaks caused by faulty construction, despite the exclusion for construction defects. Id. However, the loss claimed was mold, and mold was itself specifically excluded. The ensuing loss provision thus did not operate because there was no covered loss. Id. at 274-75; see also McDonald v. State Farm Fire & Casualty Co., 119 Wn.2d 724, 735, 837 P.2d 1000 (1992) (cracked foundation an excluded peril, so ensuing loss exception to defective construction exclusion did not apply.)
The Bedford contends the policy language here is an affirmative grant of coverage "because it focuses on the penultimate cause of the ultimate loss, not the ultimate loss itself." App. Br. at 44. Because rainwater intrusion is covered, The Bedford contends the end result (decay) is covered. But the ensuing loss clause is not a grant of coverage. Wright, 124 Wn. App. at 274. By its plain language, the clause operates only where the loss is affirmatively covered by other provisions of the policy. Here the claimed loss was decay, which is expressly excluded from coverage.
Thus, as in McDonald and Wright, the chain of causation is irrelevant because the ultimate event is an excluded peril. The order directing a verdict on this issue was proper.
"Collapse" Definition. Safeco's policy did cover The Bedford for collapse caused by latent defect or decay. The court ruled that "collapse" means "substantial impairment of structural integrity." Clerk's Papers at 14. Safeco sought a further clarification of that standard, but the court reserved ruling until the parties could attempt to agree on a technical standard from which each party's experts could testify. The parties reached the following stipulation, drafted by The Bedford and signed by Safeco with minor changes: "'[S]ubstantial impairment of structural integrity' means the inability of a building, any part of a building, or any structural member of a building to sustain the design loads specified in the Uniform Building Code." Clerk's Papers at 860.
This definition itself became a central issue at trial, focused upon the term "sustain." In initial drafts of the stipulation, and in colloquy with the court, the parties used "meet" or "support" instead of "sustain."
Safeco's experts testified that this choice of words affected the standard for determining structural integrity, which is calculated using a mathematical formula called a demand/capacity (d/c) ratio. The ratio expresses the amount of weight a particular beam or building component must carry (demand) as compared to its ability to support that weight (capacity). The ratio is expressed by a single number, where 1.0 indicates that demand is equal to capacity, a lower number indicates that the beam is stronger than necessary, and numbers higher than 1.0 indicate that demand exceeds capacity and structural integrity is compromised. Safeco's engineers testified that "meets design loads" is a high standard of structural integrity requiring calculations resulting in a 1.0 or less, but that "sustains design loads" is satisfied by a ratio of 1.5 or less.
The Bedford's engineers disagreed, and testified the "sustains" standard requires a 1.0 ratio. The difference is critical, because using the 1.0 ratio, it is apparently undisputed that portions of the structure were in a state of collapse during Safeco's policy period.
The Bedford asserts it was the court's duty to interpret and enforce the stipulation as a contract, and that the parties intended to define "collapse" as occurring when a structure is unable to "meet" code loads. The Bedford contends the court erred by refusing to so instruct the jury, by permitting Safeco's experts to testify using a 1.5 d/c ratio, and by denying The Bedford's post-trial motion for judgment as a matter of law.
The record, however, does not suggest that the stipulation was intended to call for any particular calculation. The Bedford chiefly emphasizes Safeco's willingness to agree to a "meet the code" standard. But The Bedford drafted the language, and there is no indication that either party expected the stipulation to be dispositive in an engineering sense. The stipulation contains no reference to ratios, nor was any ratio mentioned in colloquy with the court.
The intent was to provide an objective, measurable standard for the experts, and the parties accomplished that goal by referencing the Uniform Building Code. In declining to rule that the stipulation mandated analysis according to a particular formula, the court simply gave effect to the purpose of the stipulation and left it to the jury to decide which side's experts offered the most persuasive analysis. This was not error.
Unproduced Draft Report. The Bedford next contends the trial court erred in denying curative jury instructions, a sanction of default, and, after the verdict, a new trial, arguing that Safeco's failure to produce Paustian's draft report significantly prejudiced The Bedford's ability to effectively prepare and argue its claim for collapse coverage.
Decisions on sanctions for discovery violations are reviewed for abuse of discretion. Washington State Physicians Ins. Exch. & Ass'n v. Fisons Corp., 122 Wn.2d 299, 338, 858 P.2d 1054 (1993). A court abuses its discretion when a ruling is manifestly unreasonable, or discretion is exercised on untenable grounds or for untenable reasons. Id. at 339. Findings of fact as to whether a party willfully violated discovery rules are reviewed for clear error. Roberson v. Perez, 123 Wn. App. 320, 334, 96 P.3d 420 (2004), review denied, 155 Wn.2d 1002 (2005).
The Bedford is correct that electronic files and experts' draft reports are generally discoverable. But failure to produce a responsive document is not necessarily a violation of discovery rules. See Panorama Village Homeowners Ass'n v. Golden Rule Roofing, Inc., 102 Wn. App. 422, 431, 10 P.3d 417 (2000). The court's implicit finding that Safeco's failure to produce the document was not misconduct was informed in part by the fact that the December 10 draft was stored only on a backup disc at an offsite location:
While I agree that both Mr. Paustian and Mr. Bozick are testifying experts and that, arguably, hard copies of [electronic] draft reports are discoverable, I am aware of no legal principle that would require a testifying expert witness to separately retain all electronic drafts, including those that were overridden or subsumed during the drafting process.
Clerk's Papers at 2149.
Safeco had produced the e-mail to which the draft was an attachment. The court accepted the testimony of counsel for Safeco that he had not received or reviewed the attachment. Under the circumstances, there is no clear error in the implicit finding that there was no misconduct.
Because there was no misconduct, the court did not err in denying curative instructions or sanctions, and the cases The Bedford cites are inapt. See Smith v. Behr Process Corp., 113 Wn. App. 306, 328, 54 P.3d 665 (2002) (defendant manufacturer conceded deliberately withholding fact and results of performance tests on product at issue in litigation); Gammon v. Clark Equipment Co., 38 Wn. App. 274, 277-79, 686 P.2d 1102 (1984), aff'd, 104 Wn.2d 613, 707 P.2d 685 (1985) (defendant manufacturer willfully violated court order compelling production of all accident reports where it produced only five reports and at trial it became apparent two boxes of relevant documents had been withheld).
Even absent misconduct, however, a new trial is appropriate where the party against whom judgment was entered was prejudiced by a "surprise which ordinary prudence could not have guarded against." CR 59(3). The Bedford might have guarded against surprise by seeking to compel discovery of the draft referenced in the e-mail. The key question, however, is prejudice, which the trial judge here did not find. The Bedford gained access to the document during trial, was able to cross-examine a Pacific witness about the document, and questioned both Pacific witnesses extensively about the "meet" versus "sustain" standards. Certainly cross-examination is not a substitute for timely discovery. But whether surprise should form the basis for a new trial is a discretionary determination for the trial court, which is best able to assess any prejudice. Kramer v. J.I. Case Mfg. Co., 62 Wn. App. 544, 561-62, 815 P.2d 798 (1991). We cannot conclude the court abused its discretion in denying a new trial.
Extra Expense Liability. Because The Bedford had no coverage under the policy, there is nothing upon which to base a claim for extra expense damages, and The Bedford's assignment of error on that issue is moot.
Bad Faith. Finally, The Bedford argues the trial court erred in denying its motion to compel discovery of documents for which Safeco asserted attorney-client privilege, without first inspecting the documents in camera. A decision whether to review documents in camera before ruling on a motion to compel is reviewed for abuse of discretion. Overlake Fund v. City of Bellevue, 60 Wn. App. 787, 796-97, 810 P.2d 507 (1991).
The attorney-client privilege protects confidential communications between attorneys and clients from discovery or public disclosure. RCW 5.60.060(2)(a); Barry v. USAA, 98 Wn. App. 199, 204, 989 P.2d 1172 (1999). The burden of establishing privilege rests on the party asserting it. Versuslaw, Inc. v. Stoel Rives, LLP, 127 Wn. App. 309, 332, 11 P.3d 866 (2005).
The Bedford's claim of bad faith was chiefly founded upon Safeco's use of the "imminent collapse" standard to deny The Bedford's claim. "Imminent collapse" or "imminent peril of collapse" is a definition accepted only in a minority of jurisdictions, and was rejected by the trial court here in favor of the more prevalent standard of "substantial impairment of structural integrity." The Bedford sought to establish that the "imminent collapse" standard was adopted in bad faith.
During discovery on this issue, Safeco claimed attorney-client privilege for approximately 30 log entries in the "claims virtual office," which is Safeco's electronic claims management system. Safeco asserts that each entry contains a communication between Safeco claim representatives and Safeco attorneys.
This assertion cannot be verified from the privilege log. The disputed documents are described simply as "claim log entries" made by claim adjusters, claim managers, and other Safeco employees. No attorney is mentioned, no basis for privilege is stated, and none is revealed by the description in the log.
On appeal, Safeco argues that discovery of privileged materials is permitted only upon a showing of civil fraud. But this assumes there is privilege in the first place. It is Safeco's burden to establish privilege, and the only evidence submitted to the trial court (the privilege log) does not satisfy that burden. Under these circumstances, in camera review of the disputed documents was the only method by which the court could decide whether the privilege applied. See Barry, 98 Wn. App. at 208 ("the only way a court can accurately determine what portions of a file may be exempt from disclosure as work product is by an in camera review of the file"). We hold that refusal to review the documents before recognizing the privilege was an abuse of discretion.
We remand for in camera review of the disputed documents and such other proceedings as may thereafter be appropriate. We affirm all other trial court rulings.
AGID and APPELWICK, JJ., concur.
 The Bedford's ratio argument was not its original approach to the calculation. Up to and including the argument on summary judgment, The Bedford contended the structure should be assessed for collapse using a factor-based approach unrelated to building code standards and not based solely upon a demand/capacity calculation.
 See, e.g., Antioch Co. v. Scrapbook Borders, Inc., 210 F.R.D. 645, 652 (D. Minn. 2002); Simon Prop. Group L.P. v. mySimon, Inc., 194 F.R.D. 639, 640 (S.D. Ind. 2000). The Bedford argues the court found the document not subject to disclosure. The record reveals no such ruling. Rather, the court's remarks related to the practical issues associated with preserving digital evidence.
 Zaverl v. Hanley, 64 P.3d 809, 815 (Alaska 2003) ("opportunity to cross-examine at trial [is] no substitute for pretrial discovery").
 One exception to the privilege rule is known as the civil fraud exception, under which privileged communications are discoverable if the party seeking discovery shows that "(1) its opponent was engaged in or planning a fraud at the time the privileged communication was made, and (2) the communication was made in furtherance of that activity." Barry, 98 Wn. App. at 205. The burden of establishing the civil fraud exception rests with the party invoking that exception. Id.; see also Escalante v. Sentry Ins., 49 Wn. App. 375, 397, 743 P.2d 832 (1987).
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