WASHINGTON BAD FAITH LAW: 4 Sensible Questions

Question #1:
Is it possible to bring a bad faith claim for acts which are not specifically proscribed by the Washington Administrative Code?

ANSWER: Absolutely. The WAC’s only set minimum standards for insurer conduct, and compliance with the WAC’s alone does not guarantee an insurer has avoided a bad faith claim.  The duty to act in good faith is “fairly broad and may be breached by [a variety of] conduct short of intentional bad faith or fraud.”  See Truck Insurance Exchange v. Vanport Homes, Inc., 147 Wn.2d 751, 764, 58 P.3d 276 (2002).  The trier of fact – typically a jury – will be charged with determining if the questioned conduct rises to the level of bad faith.  See Kallveig, supra.

Question #2:
These standards seem pretty amorphous and plaintiff-friendly.  Is there any good news for insurers in the case law?

ANSWER: Yes.  While bad faith has been loosely defined and thus leaves plenty of room for creative argument by plaintiff’s counsel, the Washington courts have stressed repeatedly that when an insurer’s management and handling of a claim are at issue, “mistakes and clumsiness alone do not amount to bad faith.”  See Insurance Co. of Pennsylvania v. Highlands Ins. Co., 59 Wn. App. 782, 786, 801 P.2d 284 (1990).

The Washington Supreme Court has described the bad faith plaintiff’s “heavy burden” in proving their case thusly:

Applying the bad faith standard in the summary judgment context, an insurer is ordinarily entitled to summary judgment dismissal of a bad faith claim unless the insured shows there was no reasonable basis for the insurer’s actions…This “fairly debatable” standard for determining bad faith, as it is commonly called, is followed in the vast majority of [American] jurisdictions.  The logic of putting an insured to task in bad faith cases has been described as follows: “An insurer is entitled to dispute claims so long as it has a reasonable basis.  If reasonable minds could not differ [on the facts]….a verdict should be directed or summary judgment rendered….If that cannot be done, it ordinarily must follow that the insurer had reasonable grounds to dispute the facts, precluding any possibility of bad faith.”

Ellwein v. Hartford Accident & Indemnity Co., 142 Wn.2d 766, 775-777, 15 P.3d 640 (2001).

If you can clear this hurdle as a claimant, there is a rebuttable presumption that you have suffered harm.  See Besel v. Viking Insurance Co., 146 Wn.2d 730, 737, 49 P.3d 887 (2002).  But in the absence of a WAC violation, meeting the “no reasonable basis”/”fairly debatable” standards can be challenging.  The vast majority of reported cases arise out of conduct that clearly violates the administrative regulations.

Question #3:
How does bad faith differ from a negligence-based claim?  Can you have one without the other, and does a negligence claim get you anything that a bad faith theory does not?

ANSWER: The two claims almost always arise in tandem.  Circumstances have sometimes arisen in reported cases which hint at the possibility that an insurer could act in good faith, but still perform negligently in the handling and evaluation of the claim.  The lower court opinion which led to Besel, supra, suggests one way this could occur…the insurer could act with a reasonable basis in refusing to settle within the policy limits when the merits of the claim were viewed prospectively, but might have neglected the claim while in progress (losing the claims file in midstream and trying to rebuild it from scratch in the midst of negotiations).

It’s harder to imagine a scenario where an insurer would be guilty of bad faith but escape liability under the negligence standard.  However, the negligence claim might offer the potential for third-party actions which the bad faith claim clearly does not.  In contrast with some other U.S. jurisdictions, Washington law has held that only the insured can sue his insurer for bad faith….a third-party harmed by the insurer’s conduct lacks standing to sue.  See Planet Insurance v. Wong, 74 Wn. App. 905, 877 P.2d 198 (1994).  However, a negligence claim is governed by the statutory definition of “fault”, which encompasses “acts or omissions…that are in any measure negligent or reckless towards the person or property of the actor or others” See RCW 4.22.015.  The potential for third-party actions involving the fault of multiple jointly/severally liable defendants has yet to be explored.

Question #4:
Is there anything left from the old “breach of contract” theory of recovery under Washington law?

ANSWER: Maybe, in a backhanded way.  As in Canada, the notion of the duty of good faith and fair dealing arose out of similar principles in the contract field, including notions of fiduciary duties.  Again, as in Canada, the Washington courts have noted that the duty owed to insureds is not a true fiduciary duty, since the adversarial nature of claims evaluation precludes any expectation that an insurer will act for the insured with a duty of “undivided loyalty”.  Still, the quasi-fiduciary relationship presumed to exist in all contracts of insurance, and especially first-party “peace of mind” contracts, has led the Washington courts to define insurer’s fiduciary responsibilities very broadly.  See generally Jones v. Allstate, 146 Wn.2d 291, 45 P.3d 1068 (2002), where a claimant was permitted to sue the third-party tortfeasor’s insurance adjuster for damages arising from statements/advice given regarding settlement.  In a 5-4 decision, the Court held that the adjuster had committed unauthorized practice of law in giving her advice, and that the adjuster owed a duty to third parties not to give such advice – finding the existence of a duty in part on the fiduciary relationship implicit in the contract of insurance (!).  The 4 member dissent (correctly?) pointed out that the relationship isn’t truly a fiduciary one even between the insurer and insured, and clearly could not be considered as such between the insurer and third parties harmed by the insured’s conduct with which the insurer comes into contact.