Insured Cannot Avoid Exclusion Inadvertently Removed from CGL Policy Where It Knew the Removal Was a Mistake, but Court Finds Coverage Under D&O Policy
The United States District Court for the Western District of Washington has held that, where the insured knew prior to purchasing a CGL policy that it would include a certain exclusion, and the insurer accidentally removed that exclusion when it renewed the policy, the policy was subject to reformation to add the exclusion back. General Cas. Co. of Wis. v. Reid Hein & Assocs., LLC, 2026 WL 482427 (W.D. Wash. Feb. 20, 2026). Because the exclusion applied to the claims in the underlying class action, the court also concluded that the insurer had no duty to defend and that the insured’s bad faith-related regulatory claims failed. The court also held, however, that coverage was available to the insured under its D&O policy, rejecting the carrier’s late notice and prior acts arguments.
The insured, a company offering “timeshare exit” services, had a significant loss history, including a lawsuit by the State of Washington alleging unfair and deceptive practices in its advertising and handling of customer funds. As a result, as a condition of issuing a CGL policy to the insured, the insurer mandated an exclusion precluding coverage for personal and advertising injury. The original policy contained that exclusion, and the renewal was intended to have the same terms and conditions. However, while processing the renewal, an employee of a third‑party vendor inadvertently deleted the exclusion from the primary renewal policy. The excess policy for the renewal policy period continued to include the exclusion. During the renewed policy period, customers filed a class action alleging that the insured had falsely advertised its ability to relieve them of their timeshare obligations and improperly treated upfront payments as immediate income rather than placing them in escrow. The insured tendered the class action for coverage under its CGL policy and a separate D&O policy.
The CGL insurer acknowledged receipt and then spent nearly a year investigating the omission of the exclusion from the renewal policy. The insurer ultimately issued a reservation of rights letter explaining that it would defend the insured and that the exclusion appeared to have been removed in error. The D&O insurer denied coverage under that policy’s prior acts exclusion and for late notice. The class action ultimately settled, and the insured assigned rights to the class representative to pursue claims against the insurers. The CGL insurer filed suit seeking reformation of the renewal policy to restore the personal and advertising injury exclusion and for a determination that the exclusion barred coverage. The class representatives counterclaimed against the CGL insurer and asserted third-party claims against the D&O insurer for breach of contract, bad faith, and statutory violations. All parties moved for summary judgment.
The court granted reformation, finding clear and convincing evidence of mutual mistake. The record showed that the exclusion had been specifically negotiated as a condition of coverage, that the insured knew it could not obtain CGL insurance without it, and that the renewal was intended to carry forward all prior policy terms. The continued presence of the exclusion in the umbrella policy reinforced the conclusion that the parties had not intended to change the scope of coverage. The court rejected the argument that reformation was barred by alleged bad faith, explaining that claims‑handling conduct occurring after the contract was formed does not affect the parties’ intent at the time of contracting. With the exclusion restored, the court concluded that it barred coverage for all claims, including that the insured mishandled customer funds. In reaching this conclusion, the court rejected the argument that the mishandling of funds claim triggered the policy’s property damage coverage, explaining that financial assets lack physical form and thus are not “tangible property.”
The court also granted summary judgment to the CGL insurer on the bad faith claim and claim alleging violation of the Insurance Fair Conduct Act (“IFCA”). Although the CGL insurer took almost a year to issue a coverage position, the court found that a reasonable jury could conclude that the delay resulted from a legitimate effort to investigate the missing exclusion rather than an unfounded refusal to address the insured’s tender. With respect to the IFCA claim, the court explained that the statute does not create an independent cause of action for regulatory violations without an unreasonable denial of coverage. Because the insurer had no duty to defend, there was no unreasonable denial. The court, however, did allow a Consumer Protection Act (“CPA”) claim to proceed against the CGL carrier, finding disputes of fact regarding whether the insurer violated Washington’s claims‑handling regulations.
With respect to the D&O insurer, the court held that it breached its duty to defend, rejecting the carrier’s late notice and prior acts coverage defenses. The policy required the insured to report claims “as soon as practicable.” The insured provided notice seven weeks after the class action was filed. The court confirmed that, under Washington law, an insurer may rely on late notice to deny coverage only if it can show actual and substantial prejudice, and the D&O insurer did not present any evidence of prejudice. With respect to the prior acts exclusion, the court found that the class action included allegations of conduct occurring both before and after the “prior acts” date. The court held that the exclusion did not apply to post‑“prior acts” date conduct. The court held that, because there was at least a possibility of coverage, the D&O insurer was required to defend. The court denied the claimants’ bad faith, IFCA, and CPA claims against the D&O insurer, finding insufficient evidence that the insurer acted unreasonably.
