An insurance company's duty of good faith and fair dealing is incorporated into every insurance policy. Generally speaking, the duty requires an insurance company to act fairly toward its insured and not place its own interests above the insured's interests, whether in the context of an insured's claim for first-party benefits (i.e., a claim for damages to the insured's home) or where the insured has been sued by a third party. In the third-party scenario, the insured requests the insurance company defend the insured against the third-party's claim and indemnify the insured for any resulting damages, whether through a settlement or judgment, up to any applicable policy limits. The insurance company may be held liable for breaching its duty of good faith and fair dealing (or, stated differently, committing “bad faith”) if it declines to honor its contractual promises to the insured without any reasonable basis.
In recent years, insureds have sought to broaden “bad faith” claims against insurance companies in a variety of situations. Unsurprisingly, some courts have taken expansive views on when and under what circumstances an insurance company can commit bad faith, often with far-reaching implications for insurance companies that may require seismic changes to the way they operate.
A recent decision by the District Court for the Eastern District of Washington is the latest example of this ever-expanding view of “bad faith” and the duties it imposes. Security Nat'l Ins. Co. v. Construction Assocs. of Spokane, 2022 WL 884911 (E.D. Wash. March 24, 2022). Although the facts are complicated, the case involved a request that the insurance company, Security National, provide a defense to the general contractor, that hired Security National's insured as a subcontractor, against claims in a lawsuit filed by one of the subcontractor's employees. The general contractor tendered the defense of this lawsuit to Security National, citing a certificate of insurance naming the general contractor as an additional insured under the Security National policy.
In October 2019, after receiving the general contractor's tender of defense, Security National denied its request. Security National advised the general contractor that the certificate of insurance “confer[ed] no rights” and “was produced for information” only. Security National took the position the certificate of insurance did not change the policy and there was no endorsement granting coverage to the general contractor. At the time of the denial, Security National's adjusters were unaware of the Washington Supreme Court's decision in T-Mobile USA Inc. v. Selective Ins. Co. of Am., 450 P.3d 150, handed down on October 10, 2019. That decision addressed the issue of whether an insurance company may be bound by an agent's representations regarding certificates of insurance, an issue of great importance for Security National's duty to defend the general contractor.
Ultimately, Security National filed a declaratory judgment action against the general contractor, seeking a ruling that it owed no defense or indemnity in the underlying case. After taking an assignment of the general contractor's claims, the injured worker counterclaimed against Security National for, among other things, breach of contract, coverage by estoppel, and breach of the duty of good faith and fair dealing. The parties filed cross-motions for summary judgment on whether Security National breached its duty to defend and whether it did so in “bad faith.”
The court concluded Security National “acted in bad faith as a matter of law.” Displeased with Security National adjusters' investigation at the time it made its decision to reject the general contractor's tender of defense, the court reasoned Security National's adjusters had an affirmative obligation to survey the legal landscape in Washington to avoid missing a decision the court described as a “blockbuster”:
True, the adjusters are not attorneys in Washington and are presumably not trained in the same kinds of legal research techniques as lawyers. But that does not excuse an adjuster from having at least a baseline understanding of the relevant state's law necessary to carry out their duties. Instead, it means insurance companies must undertake what in practice are reasonably small steps to ensure adjusters are equipped to make reasonable coverage and defense determinations. Such steps could include teaching adjusters to run case searches or, more likely, supplying adjusters with subscriptions to relevant legal newsletters, a resource most attorneys rely on to keep apprised of legal developments. Regardless, ignorance of the applicable case law, even of relatively new case law, does not excuse the conduct of adjusters who deny defense or indemnification. Doing otherwise would allow insurance carriers to intentionally stay ignorant and hide behind their ignorance when their claim denials are challenged. Adjusters must equip themselves or else seek out those with the requisite tools and knowledge.
Stated differently, the court held insurance companies that employ adjusters without ensuring their adjusters stay current on legal developments in whatever states they operate do so at their own peril.
The Security National decision highlights the importance for insurance companies to seek advice from qualified coverage counsel before making a coverage determination. Our seasoned lawyers are available and can be reached at 414-273-1300.
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