As
Published in October 2003 King County Bar Bulletin
Insurance has
become a necessary item for all Washington residents and businesses. Despite the State requiring insurance for
many activities, insurance is a good way to manage risk. However, the relationship between the insurer
and insured has many different duties and obligations. One major duty between the insurer and the
insured is the obligation of good faith and fair dealing.
Every insurer has
a legal duty to act in good faith. This
duty is one of fair dealing and a responsibility to give equal consideration to
the insured’s interests.[1] To avoid bad faith claims an insurer must
comply with both the legislative and judicial standards.[2] In addition, the Insurance Commissioner created
regulations defining unfair claims practices.[3] Under RCW 19.86.920, there
is an implied reasonableness requirement in defining unfair methods of
competition or unfair or deceptive acts or practices.[4]
An insured cannot prove bad faith solely on the ground that the insurer’s decision was incorrect.[5] “Mistakes and clumsiness alone do not amount to bad faith.”[6] An insurer acts in bad faith only when the position it takes is unreasonable, frivolous, or untenable.[7] Bad faith claims are brought under the Consumer Protection Act.[8]However an insurer may be negligent, even where no bad faith exists.[9] A CPA claim has five elements: (1) an unfair or deceptive act or practice; (2) that occurs in trade or practice; (3) impacts the public interest; (4) injury plaintiff’s business or property; and (5) a causal link between the unfair or deceptive acts and the injury.[10] An insurer's breach of its duty of good faith constitutes a per se violation of the CPA.[11]
For first party
bad faith claims, “[a]ny violation that would constitute an unfair trade
practice under WAC 284-30-330 is an unfair trade practice under RCW 48.30.010
regardless of whether it would take more than a single violation of WAC 284-30-330 for
the Insurance Commissioner to exercise any administrative powers to seek
corrective action or penalties against the insurer.”[12]
Therefore a first party CPA claim may proceed with a
single bad faith violation; however, the Commissioner’s power may not be
triggered because WAC 284-30-300 sets forth minimum standards
which, if violated with such frequency as to indicate a general business
practice, will be deemed to constitute unfair claims settlement practices. This implies that the Commissioner must show
a repeated course of conduct
Typical Bad
Faith Acts
What
follows are short descriptions of typical bad faith situations and how the
courts have dealt with them.
Denial of
Defense/Coverage
An insurer may not
deny defense of a claim unless those claims are clearly not covered.[13] However, where the duty to defend is denied
and sufficient ambiguity exists regarding the policy precludes a bad faith
claim, the insured's unfair or deceptive act or practice claim also fails.[14]
Wrongful
Refusal to Pay a Claim [15]
An
insurer may be liable for a wrongful refusal to pay a claim.[16] Simply making an offer to settle for lower
than the amount the insured actually recovers is not bad faith.[17] The test of bad faith is whether the insurer
has a reasonable justification for the low offer.[18]
Prompt
Investigation of Claims [19]
An insurer also
must promptly investigate claims. However,
where no evidence exists that an insurer committed the violation with such
frequency as to indicate a general business practice the CPA claim fails.[20] However,
an insurer did violate the CPA when it failed respond to a claim for five
months, despite insured’s repeatedly request for permission to begin mitigation.[21]
Failure to
Settle Within Policy Limits
An insurer agrees
to "pay on behalf of the insured all sums which the insured shall become
obligated to pay as damages,"[22]
subject to the policy limits.[23] An insurer must also indemnify its insured
judgments that impose damages for a covered event.
An insurer's
general obligation of good faith and fair dealing requires it to settle even
though policy may not specifically impose that duty.[24]
This duty to settle arises out of an insurer's right to control the
defense.
Negligence
Claims
An insurer also
has a duty to exercise reasonable care with respect to the interests of its
insured.[25]
Even if an insurer acts in good faith, it may be liable to its insured for any
proximal negligence.[26] In order to prove a negligence claim against
an insurer, an insured must establish that the insurer was at "fault"
as that term is defined in RCW 4.22.015.
In that respect, a
negligence claim against an insurer is no different than any other negligence
claim. In proving his or her negligence claim, an insured may show
noncompliance with WAC § 284-30-300 (1992). However, a violation of those
standards no longer constitutes negligence per se.Further, court makes a threshold
determination, regarding whether a duty exists, before submitting an insured's
negligence theory to the trier of fact.[27]
Remedies
An
insured that wins on a bad-faith or negligence claim against their insurer is
entitled to tort remedies.[28] However, no Washington court has specifically
addressed the general measure of damages in this context. An insurer's breach of its duty of good faith
constitutes a per se violation of this act; the remedy includes costs, attorney
fees and treble damages.[29] In the negligence context, the plaintiff is
limited to damages proximately caused by the negligent acts.
Third Party
Claims
WAC 284-30-300 has
several standards which appear to apply to third-party claimants against a
tortfeasor’s insurer. However, an
injured party has no right to assert a bad faith claim against the tortfeasor’s
insurer.[30] The Washington Supreme Court has held that a
third party claimant may not sue a tortfeasor’s insurance company directly for
any alleged breach of the duty of good faith under a liability policy.[31]
One exception to this rule is when the third-party claimant is assigned the insured’s rights under the policy. To do this, the third-party claimant and the insured covenant to not execute against the insured. Then the insured-tortfeasor assigns his coverage and bad-faith claims against his insurer to the third-party claimant. Finally, the third-party claimant and the insured consent to a judgment.[32] Note that no-assignment clauses in the policy do not prohibit assignments "made after the events giving rise to liability have already occurred."[33]
Bad faith claims
are designed to reign-in insurers when they step out of line. However, they should not be used to force an
insurer to settle claims where genuine issues exist regarding the negligence of
the insured and contributory fault of the plaintiff.
[1] Tank v. State Farm Ins. Co., 105 Wn.2d 381, 715 P.2d 1133 (1986).
[2] Id. at 386, RCWA 48.02.030.
[3] WAC 284-30-330
[4] American Mfrs. Mut. Ins. Co. v. Osborn, 104 Wn. App. 686, 17 P.3d 1229, review denied, 144 Wn.2d 1005, 29 P.3d 717 (2001).
[5] Transcontinental Ins. Co. v. Washington PUD Util. Sys., 111 Wn.2d 452, 470, 760 P.2d 337 (1988).
[6] Ins. Co. of Pennsylvania v. Highlands Ins. Co., 59 Wn.App. 782, 786, 801 P.2d 284 (1990).
[7] Liberty Mut. Ins. Co. v. Tripp, 144 Wn.2d 1, 25 P.3d 997 (2001).
[8] Chapter 19.86, RCW
[9] First State Ins. Co. v. Kemper Nat’l Ins. Co., 94 Wn.App. 601, 612, 971 P.2d 953 (1999) (Where the court allowed instructions on both negligence and bad faith because they are two separate causes of action).
[10] Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 719 P.2d 531 (1986)
[12] Industrial Indem. Co. of Northwest, Inc. v. Kallevig, 114 Wn.2d 907, 923, 792 P.2d 520 (1990)
[13] Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 951 P.2d 1124 (1998).
[15] WAC 284-30-330(7)
[16] Gould v. Mutual Life Ins. Co., 37 Wn.App. 756, 683 P.2d 207 (1984).
[17] Keller v. Allstate, 81 Wn.App. 624, 915 P.2d 1140 (1996).
[18] Ellwein v. Hartford Accident & Indem. Co.,142 Wn.2d 766; 15 P.3d 640 (2000)
[19] WAC 284-30-330(3)
[20] Underwriters at Lloyds v. Denali Seafoods, Inc., 729 F. Supp. 721 (W.D. Wash. 1989), aff'd, 927 F.2d 459 (9th Cir. 1991).
[21] Wolf Bros. Oil Co. v. International Surplus Lines Ins. Co., 718 F. Supp. 839 (W.D. Wash. 1989).
[27] Stouffer & Knight v. Continental Cas. Co , 96 Wn. App. 741, 753, 982 P.2d 105 (1999).
[28] Gain v. Carroll Mill Co., 114 Wn.2d 254, 257, 787 P.2d 553 (1990).
[30] Planet Ins. Co. v. Wong, 74 Wn.App. 905, 909, 877 P.2d 198 (1994); Smith v. Safeco, 112 Wn.App. 645, 50 P.3d 277 (2002).
[31] Tank v. State Farm Ins. Co., 105 Wn.2d 381, 394, 715 P.2d 1133 (1986).
[32] Chaussee v. Maryland Cas. Co. 60 Wn. App. 504, 803 P.2d 1339 (1991).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.