COMPARATIVE BAD FAITH LAW: BAD FAITH REFUSAL TO SETTLE; COMPARING Shea (BC) with Besel (WA)

This will be a two part post. First an introduction will be provided and then the outline of Shea v. M.P.I.C., 55 B.C.L.R. (2d) 15 (1991). In the second part of this post (coming next week) a comparison will be made with Besel v. Viking Insurance, 146 Wn.2d 730 (2002) and then we’ll explore how the Washington Supreme Court held and the result.

Both British Columbia and Washington have recognized a cause of action for bad faith in the context of an insurer’s failure/refusal to settle a claim within policy limits once liability and damage in excess of limits has become reasonably clear.  Likewise, both jurisdictions recognize the right of an assignee (usually the tort plaintiff) to pursue a bad faith claim held by the tortfeasor against his insurer.

The typical approach involves an assignment of the defendant’s bad faith rights in exchange for an agreement by the plaintiff not to seek judgment amounts against the defendant’s personal assets in excess of the applicable insurance limits.

The difference in the approaches from the two jurisdictions, as you will see, lies in the fact that Washington’s more robust bad faith law provides claimants with a mechanism for obtaining an assignment of these rights through a consent judgment in lieu of trial, whereas the British Columbia approach offers no avenue for obtaining these rights until an excess tort judgment has been obtained at trial.

Shea v. M.P.I.C., 55 B.C.L.R. (2d) 15 (1991)

British Columbia “duty to settle” law acknowledges the following:

1.    The relationship between the insurer and the insured is a commercial one, in which the parties have their own rights and obligations;
2.    Within the commercial relationship, special duties may arise over and above the universal duty of honesty, which do not reach the fiduciary standard of selflessness and loyalty;
3.    The exclusive discretionary power to settle liability claims given by statute to the insurer in this case, places the insured at the mercy of the insurer;
4.    The insured’s position of vulnerability imposes on the insurer the duties:
a.    of good faith and fair dealing;
b.    to give at least as much consideration to the insured’s interests as it does to its own interests; and
c.    to disclose with reasonable promptitude to the insured all material information touching upon the insured’s position in the litigation, and in settlement negotiations.
5.    The fact that the insured is at the mercy of the insurer for the purposes of settlement negotiations gives rise to a justified expectation in the insured that the insurer will not act contrary to the interests of the insured, or will, at least, fully advise the insured of its intention to do so;
6.    While the commercial nature of the relationship permits an insurer to assert or defend interests which are opposed to, or are inconsistent with, the interests of its insured, the duty to deal fairly and in good faith requires the insurer to advise the insured that conflicting interests exist, and of the nature and extent of the conflict;
7.    The insurer’s statutory obligations to defend the insured imposes on the insurer, where conflicting interests arise, a duty to instruct counsel to treat the interests of the insured equally with its own; and where one counsel cannot adequately represent both conflicting interests, an obligation to instruct separate counsel to act solely for the insureds, at the insurer’s own cost;
8.    The insurer’s duty to defend includes the obligation to defend on the issue of damages, and to attempt to minimize by all lawful means the amount of any judgment awarded against the insured; and
9.    Defence preparations and settlement negotiations must take place in a timely way, and, where last minute negotiations are required, advance planning must be made to ensure that the insured’s interests are given equal protection with those of the insurer.

Id. at 69-70

NOTE that in Shea, the insurer attempted to argue that the defendant had no bad faith claim to assign, since the post-judgment covenant not to execute prevented any risk of loss to the insured’s personal assets by way of the excess judgment.  The Court rejected this view, but based its rejection in an analysis of precedent regarding assignee/assignor law and the impact of a covenant not to execute against the assignor as to rights/claims against a third party.