Washington Hospital Liability Insurance Fund v. Public Hospital District No. 1

Petrich, J.

— Public Hospital District No. 1 of Clallam County (Hospital District) sued its treasurer, Robert Clark, to recover losses from an unsuccessful investment of approximately $1 million of Hospital District funds. The Hospital District and Clark then sought coverage of the claim under the Hospital District's insurance policy issued by Washington Hospital Liability Insurance Fund (Liability Insurance Fund). Liability Insurance Fund brought a declaratory action to determine its duty under the policy. On cross motions for summary judgment, the Superior Court found that the policy did not cover the claim in question. We reverse.

The Hospital District is a municipal corporation formed under the laws of RCW 70.44. Liability Insurance Fund is a mutual corporation consisting of several hospitals that have organized for the purpose of self-insuring against liability claims. Liability Insurance Fund issued directors' and officers' insurance to the Hospital District. Special Endorsement 2, the relevant portion of the policy, provides as follows:

I. INSURING CLAUSE:

(a) As to the Directors and Officers of the Hospital that if during the policy period any claim or claims are made against the Directors and Officers individually or collectively, for a Wrongful Act, the Fund will pay, in accordance with the terms of this endorsement, on behalf of the Directors and Officers or any of them, their Executors, Administrators or Assigns all loss which the said Directors and Officers, or any of them shall become legally obligated to pay.

(b) As to the Hospital that if during the policy period any claim or claims are made against the Directors and Officers, individually or collectively, for a Wrongful Act, the Fund will pay, in accordance with the terms of this policy, on behalf of the Hospital all loss for which the Hospital is required or permitted by law to indemnify such Directors and Officers.

II. DEFINITIONS:

(c) The term "Loss" shall mean any amount which the Directors or Officers are legally obligated to pay for which the Hospital is required or permitted by law to pay as indemnity to the Directors or Officers for a claim or claims made against the Directors or Officers for Wrongful Acts and shall include but not be limited to damages, judgments, settlements and costs, costs of investigation and defense of legal actions (excluding from such costs of investigation and defense, salaries of Officers or Employees of the Hospital) claims or proceedings and appeals therefrom, cost of attachment or similar bonds provided always, however, such subject of loss shall not include fines or penalties imposed by law or matters which are unin-surable under the law pursuant to which this policy shall be construed.

Under the policy, Liability Insurance Fund must pay "all loss" an officer or director becomes legally obligated to pay, so long as the loss is one for which the Hospital District is required or permitted by law to indemnify its officer or director. The critical question is whether the Hospital District is permitted by law to indemnify its treasurer for a loss incurred as a result of a direct claim by the Hospital District itself.

The Hospital District, as a municipal corporation, is limited to those powers expressly granted and to powers "necessarily or fairly implied in or incident to the powers expressly granted, and also those essential to the declared objects and purposes of the corporation." Washington Pub. Util. Dists.' Utils. Sys. v. PUD 1, 112 Wn.2d 1, 6, 771 P.2d 701 (1989) (quoting Port of Seattle v. State Utils. & Transp. Comm'n, 92 Wn.2d 789, 794-95, 597 P.2d 383 (1979)). Hospital districts are statutorily authorized to sue and be sued in any court of competent jurisdiction, RCW 70.44.060(8); individually or jointly to self-insure, RCW 48.62.010; and to purchase insurance to protect and hold harmless their officers from claims arising out of the performance of their duties and to hold harmless these individuals from any expenses connected with such claims against them, RCW 36.16.138. Hospital districts do not have statutory authority to indemnify their officers. However, the parties agree, as we think they must, that public hospital districts have the common law authority to indemnify their officers for loss incurred in the good faith discharge of their duties. See 3 E. McQuillin, Municipal Corporations § 12.137 (3d ed. 1982).

Liability Insurance Fund contends that if the Hospital District reimbursed its officer for the very loss it sued him to recover, such action would not be in the nature of an indemnity. It argues, rather, that indemnity requires the loss to the indemnitee to have resulted from a third party action. However, the Washington Supreme Court's decision in Washington Pub. Util. Dists.' Utils. Sys., leads us to the conclusion that indemnity can occur in a direct (2-party) action.

Washington Pub. Util. Dists.' Utils. Sys. arose from facts similar to those involved here. Public Utility District 1 of Clallam County sued its treasurer to recover losses from the treasurer's investment of its funds and requested its insurer to cover the claims. The insurer sought a declaratory judgment concerning its duty to provide coverage. The first issue, as framed by the court, was as follows:

whether a public utility district (PUD) has the constitutional and statutory authority to enter into a self-insurance agreement with other state PUD's to provide coverage for indemnification against judgment and defense costs of the PUD's own treasurer upon a direct claim by the PUD against that treasurer.

(Italics ours.) Washington Pub. Util. Dists.' Utils. Sys., 112 Wn.2d at 3.

In resolving the issue, the court observed that PUD's have statutory authority to indemnify their officers against "any action, claim or proceeding" under RCW 54.16.097. The court also observed that the statute does not indicate whether the Legislature intended to allow insurance and indemnification of only third party claims. Washington Pub. Util. Dists.' Utils. Sys., 112 Wn.2d at 9. The court held ultimately that the purpose of the statute, to protect against loss associated with public officials' good faith efforts, was best advanced by permitting a PUD to self-insure for indemnification of its officers against direct claims by the district itself. Washington Pub. Util. Dists.' Utils. Sys., 112 Wn.2d at 10.

In reaching its decision, the court did not refer to any principles of indemnification that limit indemnification to loss caused by a third party claim. Although we recognize that indemnity traditionally involves a third party claim against the indemnitee, Washington Pub. Util. Dists.' Utils. Sys. indicated that indemnification is not necessarily so limited.

While claims against directors and officers traditionally took the form of third party lawsuits or shareholders' derivative actions, courts are recognizing that coverage for direct actions is not antithetical to the objects and purposes of these policies. If insurers do not want to provide coverage for such claims an exclusion can be easily written into the contract.

Washington Pub. Util. Dists.' Utils. Sys., 112 Wn.2d at 13.

Reading Washington Pub. Util. Dists.' Utils. Sys. as we do to permit indemnification in a direct action, and given the Hospital District's common law authority to indemnify its officers, we conclude that the Hospital District is permitted by law to indemnify its treasurer for a loss caused by its own claim. The insurance policy in question does not exclude coverage of a claim of this sort. Therefore, we reverse the decision of the Superior Court and hold that the insurance policy in question provides coverage of the Hospital District's claim against its treasurer.¹ Reversed.

Alexander, C.J., concurs.

1 Washington Pub. Util. Dists.' Utils. Sys. also disposes of Liability Insurance Fund's argument that indemnification of the treasurer against the Hospital District's claim would be an unconstitutional gift of public funds. "An expenditure of public funds is unconstitutional if it is without consideration and with donative intent." Washington Pub. Util. Dists.' Utils. Sys., 112 Wn.2d at 9; Bellevue v. State, 92 Wn.2d 717, 720, 600 P.2d 1268 (1979). The insurance policy here, as in Washington Pub. Util. Dists.' Utils. Sys., limits payment to the good faith rendering of services. A rendering of services constitutes consideration and thereby removes the case from the realm of "gifts" prohibited by Const, art. 8, § 7. Washington Pub. Util. Dists.' Utils. Sys., 112 Wn.2d at 9.