Markel Insurance Company v. Secret Harbor

1 2 3 4 5 UNITED STATES DISTRICT COURT 6 WESTERN DISTRICT OF WASHINGTON AT SEATTLE 7 MARKEL INSURANCE COMPANY, CASE NO. C23-0158-KKE 8 Plaintiff(s), ORDER GRANTING MOTION FOR 9 v. LEAVE TO AMEND THE COMPLAINT 10 SECRET HARBOR, 11 Defendant(s). 12 After the Court granted in part and denied in part Markel’s motion for summary judgment, 13 Markel moved for leave to amend its complaint to, among other things, allege facts describing 14 Secret Harbor’s liquidation proceeding and the Court’s summary judgment ruling, assert new 15 coverage positions not referenced in the original complaint or in reservation-of-rights letters sent 16 to Secret Harbor, and bring new causes of action. Dkt. No. 124. 17 Because leave to amend should be liberally granted, and neither opposing party has shown 18 that prejudice would result, the Court will grant Markel’s motion. 19 I. BACKGROUND 20 Secret Harbor was a non-profit corporation and provider of therapeutic treatment for youth 21 in crisis in the Skagit Valley region. Dkt. No. 21 ¶ 2. Secret Harbor operated a residential and 22 educational school on Cypress Island until 2008. Dkt. No. 1 ¶ 9. Secret Harbor contracted with 23 24 1 Washington state (“the State”) to place wards of the State at the Cypress Island school, often as an 2 alternative to incarceration. Id. ¶ 10. 3 Secret Harbor purchased a series of one-year commercial general liability and umbrella 4 liability policies (“the policies”) from Plaintiff Markel Insurance Company (“Markel”), which 5 provided coverage from June 30, 2010, through June 30, 2019. Dkt. No. 1 ¶ 22. Since 2018, more 6 than two dozen individuals have sued or brought claims against Secret Harbor (and, in all but one 7 lawsuit, the State as well) related to alleged physical or sexual abuse at the Cypress Island school 8 prior to its closing in 2008 (“underlying lawsuits”). Dkt. No. 1 ¶ 14; Dkt. No. 21 ¶¶ 6–9. 9 Markel filed suit against Secret Harbor in this Court in February 2023, seeking declaratory 10 relief as to the coverage available under the policies with respect to the claims made in the 11 underlying lawsuits. Dkt. No. 1. Markel’s complaint alleges that plaintiffs in the underlying 12 lawsuits do not allege wrongdoing during the period or at the premises covered by any of the 13 policies, given that the earliest policy period begins in the years after the Cypress Island school 14 closed and the school is not listed as a covered premises in the policies. Id. ¶¶ 23–27. Accordingly, 15 Markel’s complaint alleges that it has no duty to defend or indemnify Secret Harbor with respect 16 to the underlying lawsuits. Id. 17 The Court previously ruled that, as the parties agreed, claims made in the underlying 18 lawsuits are not covered by the 2015–18 policies. Dkt. No. 38 at 7. The Court also ruled that the 19 designated premises endorsements attached to the 2010, 2011, and 2012 policies bar any coverage 20 available under those policies. Dkt. No. 74 at 6–8. The Court denied Markel’s motion for 21 summary judgment as to the 2013 policy, finding that coverage is available under that policy. Id. 22 at 9–10. The Court noted that the coverage available under the 2014 policy had not yet been 23 adjudicated. Id. at 10 n.8. 24 1 Shortly after the Court issued its most recent summary judgment order, Markel filed 2 another motion for partial summary judgment, requesting a ruling that there is no coverage under 3 the 2013 or 2014 excess/umbrella policies based on the same designated premises endorsements 4 that the Court had previously ruled on with respect to the 2010–12 policies. Dkt. No. 83. Before 5 that motion could be fully briefed, Secret Harbor filed for receivership and liquidation in Skagit 6 County Superior Court. Dkt. No. 90-1. Secret Harbor’s Receiver, Elliott Bay Asset Solutions 7 LLC, was appointed in June 2025 and Skagit County Superior Court ordered that all proceedings 8 against Secret Harbor be stayed. See id. The Court thus terminated the summary judgment motion, 9 among other pending motions, and stayed this action until June 16, 2026. Dkt. No. 122. 10 After the Court lifted the stay, Markel moved for leave to amend its complaint. Dkt. No. 11 124. In its motion, Markel seeks to: 12 (1) update its factual allegations, including the new underlying claims against Secret Harbor and its receivership to reflect developments since Secret Harbor filed 13 for liquidation; (2) reflect the court’s coverage rulings on MIC’s summary judgment motions; and (3) state the unresolved coverage issues raised by the 14 current set of claims and MIC’s reservation of rights letters that have yet to be determined in this matter. 15 Dkt. No. 124 at 5. The proposed amendments include eliminating certain causes of action and 16 adding others, and modifying legal theories to apply to different policies when compared with the 17 original complaint. See Dkt. No. 124-2. 18 The Court subsequently allowed the State to intervene as a Defendant, and permitted both 19 the Receiver and the State to file opposition briefs in response to Markel’s motion for leave to 20 amend.1 Dkt. Nos. 129, 133. The motion for leave to amend is now ripe for resolution. 21 22 23 1 The Court also granted the parties’ stipulated motion to amend the case schedule, which sets the deadline for filing 24 amended pleadings as October 2, 2026. Dkt. No. 129. 1 II. ANALYSIS 2 A. Legal Standards 3 A party may amend its pleading once as a matter of course, and thereafter “only with the 4 opposing party’s written consent or the court’s leave.” Fed. R. Civ. P. 15(a)(1)–(2). “The court 5 should freely give leave when justice so requires.” Fed. R. Civ. P. 15(a)(2). A court “considers 6 the following five factors to assess whether to grant leave to amend: (1) bad faith, (2) undue delay, 7 (3) prejudice to the opposing party, (4) futility of amendment; and (5) whether plaintiff has 8 previously amended his complaint.” In re W. States Wholesale Nat. Gas Antitrust Litig., 715 F.3d 9 716, 738 (9th Cir. 2013) (citation modified), aff’d sub nom. Oneok, Inc. v. Learjet, Inc., 575 U.S. 10 373 (2015). “The opposing party bears the burden to show why leave to amend should not be 11 granted.” Robertson v. Bruckert, 568 F. Supp. 3d 1044, 1047 (N.D. Cal. 2021). 12 B. Most of the Relevant Factors Support Leave to Amend. 13 The Receiver opposes Markel’s motion on delay, futility, and prejudice grounds, while the 14 State opposes the motion based on prejudice alone. Dkt. Nos. 130, 135. The Court will address 15 each disputed factor. 16 1. Markel’s New Coverage Theories Could Have Been Raised Earlier, but This Factor Alone Is Insufficient to Support Denying Markel’s Motion. 17 When considering whether an amendment would cause undue delay, courts should 18 consider whether the moving party knew or should have known the facts and theories raised by 19 the amendment at the time the original pleading was filed. AmerisourceBergen Corp. v. Dialysist 20 W., Inc., 465 F.3d 946, 953 (9th Cir. 2006). 21 With respect to the additional and modified legal claims, these claims and legal arguments 22 are based on policy language that has not changed since Markel filed the original complaint. What 23 has changed is that from this vantage point, Markel has the benefit of Court rulings on two motions 24 1 for partial summary judgment and can now tailor its claims to those rulings.2 Markel notes that 2 this case has not progressed as far as in AmerisourceBergen, where allowing amendment would 3 have required reopening discovery and delayed final judgment. Here, after a year-long stay and 4 the addition of the State as an Intervenor-Defendant, the parties agreed to essentially restart the 5 case schedule. See Dkt. No. 128. 6 It is true that permitting amendment may not significantly disrupt the proceedings in this 7 case, but this is not the type of delay to which the Receiver objects. Instead, the Receiver 8 emphasizes that Markel has known since the outset of this case what its policies say, and has had 9 repeated opportunities to consider the coverage available under those policies, and yet did not seek 10 to amend its claims to raise new coverage theories until receiving a Court ruling on the theories 11 that it originally chose to litigate. See Dkt. No. 130 at 8–10. Markel does not rebut this and in fact 12 acknowledges that it seeks to “conform its complaint to … current coverage theories.” Dkt. No. 13 137 at 7. 14 Although it is undisputed that Markel could have raised these theories earlier, undue delay 15 alone does not typically solely support denying leave to amend. Howey v. United States, 481 F.2d 16 1187, 1191 (9th Cir. 1973). Thus, the Court will consider the remaining factors as well. 17 2. The Receiver Has Not Shown that Markel’s New Claims Are Prohibited by Law and Therefore Futile. 18 The Receiver argues that Markel’s new coverage theories are futile because they are 19 prohibited by law. According to the Receiver, under Washington’s “mend the hold” doctrine, an 20 insurer is estopped from raising a new ground for denying a claim that it could have raised earlier, 21 22 2 Additional underlying lawsuits have also been filed against Secret Harbor since the drafting of the original complaint, but Markel has not explained why the existence of these new claims leads it to take different coverage positions than 23 originally taken. It appears undisputed that Markel could have asserted its new coverage arguments at the outset of this case, as Markel emphasizes that the policies themselves have not changed with time. Dkt. No. 138 at 9. As the Receiver notes, the 2013 and 2014 umbrella policies have been discussed since the outset of this litigation. See, e.g., 24 Dkt. No. 131 at 176, 201, 227, 237, 265. 1 if the insured is prejudiced by the insurer’s failure to initially raise the other ground. Dkt. No. 130 2 at 12 (citing Karpenski v. Am. Gen. Life Cos., LLC, 999 F. Supp. 2d 1235, 1245 (W.D. Wash. 3 2014)). Markel contends the doctrine does not apply to this situation because it has denied no 4 claims, but has defended under “a full and complete reservation of its rights, expressly reserving 5 its right to supplement its coverage positions as facts developed.” Dkt. No. 137 at 7. 6 Indeed, the Receiver has not cited a case applying the “mend the hold” doctrine or other 7 form of estoppel to scenarios beyond the denial of a claim. There is authority suggesting that this 8 doctrine does not apply to non-denials of coverage. See, e.g., Dentists Ins. Co. v. Yousefian, No. 9 C20-1076RSL, 2023 WL 4106220, at *12 (W.D. Wash. June 21, 2023). Because it is not clear at 10 this point that Markel’s new claims are obviously futile, this factor does not support denying 11 Markel’s motion. See Equal Emp. Opportunity Comm’n v. Crew Concepts, Inc., No. CV 06-388- 12 S-EJL, 2007 WL 9747512, at *2 (D. Idaho July 30, 2007) (“A motion for leave to amend will not 13 be denied on the basis of futility unless it is facially obvious that amendment would be frivolous.”). 14 3. Neither the Receiver nor the State has Identified Prejudice That Would Flow From the Amendment. 15 The Receiver argues that allowing Markel to shift its coverage theories now would 16 prejudice the Receiver’s ability to protect the Receivership Estate, administer claims, evaluate 17 insurance rights, and preserve limited estate resources because Markel previously communicated 18 that funds were available under multiple policies for settlement, and now seeks to assert a new 19 “anti-stacking” argument that all coverage turns on whether there is coverage under the 2010 20 policy (because the Court has ruled that there is no coverage available under the 2010 policy due 21 to the designated premises endorsement). See Dkt. No. 130 at 6–7, 10–12. 22 23 24 1 Markel contends that the Receiver describes this prejudice in the abstract, without pointing 2 to evidence that the Receiver has been prejudiced in its ability to administer or settle claims raised 3 in the underlying lawsuits. Dkt. No. 137 at 6. 4 The State characterizes the prejudice to it as the State’s reliance on the original complaint— 5 wherein Markel described a designated premises endorsement in the 2010–12 primary policies, 6 which it reads to imply that the other policies lack such an endorsement. See Dkt. No. 1 ¶ 27. If 7 Markel had acknowledged from the outset of this case that (as it states in its proposed amended 8 complaint) the 2013 excess/umbrella policy also contains the same endorsement (suggesting that 9 the Court’s 2025 summary judgment ruling would apply to the 2013 policy and bar coverage 10 available there), then the State suggests that it would not have devoted significant taxpayer 11 resources in multiple rounds of mediation, attempting to settle the underlying litigation. Dkt. No. 12 135 at 11–12. 13 Markel counters, accurately, that its original complaint did not disclaim the existence of 14 designated premises endorsements in any policies other than the 2010–12 primary policies, so it 15 cannot be used to prevent Markel from stating truthfully that other policies do contain designated 16 premises endorsements. While the interpretation offered by the Receiver and the State may be a 17 reasonable way to read the complaint—because the original complaint highlights the existence of 18 designated premises endorsements only as to certain policies, one would assume that the other 19 policies lack the endorsement—neither the Receiver nor the State have explained why the Court 20 should credit their assumptions about the contents of the policies, particularly when they have had 21 access to all of the policies since before this litigation began. Markel’s amendment does not 22 require “undoing” any of the facts alleged in the original complaint because the original complaint 23 was silent as to whether other policies contained a designated premises endorsement as well as the 24 implications of the anti-stacking provisions. 1 Moreover, Markel repeatedly emphasized in its reservation of rights letters that it reserved 2 the right to supplement its coverage positions, even as recently as April 2025. See, e.g., Dkt. No. 3 131 at 367. Markel moved for summary judgment on some of the same theories it now seeks to 4 inject into a new version of the complaint (Dkt. No. 83), meaning that the parties have been aware 5 of most of these new coverage positions since spring 2025. That the Receiver and the State may 6 have merits arguments against those new positions does not render the new claims obviously futile, 7 and the Court will not address the viability of either the new claims or the merits defenses in the 8 context of a motion for leave to amend. 9 Moreover, that the Receiver and the State must respond to Markel’s new coverage theories 10 does not amount to prejudice. To apply arguments previously made with respect to some policies 11 to other policies does not amount to an entirely new defense strategy, nor does it alter the nature 12 of the litigation. See Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 13 1990) (finding that where new claims in an amended complaint “would have greatly altered the 14 nature of the litigation and would have required defendants to have undertaken, at a late hour, an 15 entirely new course of defense” counsels against granting leave to amend). 16 Because the Court is not persuaded that the proposed amendments would be futile or would 17 prejudice the State or the Receiver, and Markel’s delay in seeking amendment is insufficient to 18 alone justify denying leave, the Court will grant Markel’s motion, consistent with this circuit’s 19 extremely liberal policy favoring amendment. 20 21 22 23 24 1 III. CONCLUSION 2 For these reasons, the Court GRANTS Plaintiff’s motion. Dkt. No. 124. Plaintiff shall file 3 an amended complaint no later than October 23, 2026. 4 Dated this 16th day of October, 2026. 5 A 6 Kymberly K. Evanson 7 United States District Judge 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24