In previous posts, we have detailed the Insurance Fair Conduct Act (IFCA)—advising insurers on how to act within IFCA’s directives,[i] while easing concerns about IFCA’s enhanced damages provisions.[ii] At the same time, we cautioned readers to be aware that the promulgation of IFCA did not do away with first-party insureds’ previous avenues for bringing bad faith claims—under the common law or through the CPA—and that abiding by IFCA does not necessarily immunize an insurer from these other bad faith claims. What’s more, unlike with IFCA, an insured can bring a common law bad faith or CPA claim even absent an unreasonable denial of coverage or benefits. With this in mind, we detail below the still-standing doctrines of common law bad faith and CPA bad faith.
Common Law Bad Faith
Under the common law, all insurers owe a duty of good faith to their insureds for both first-party and third-party claims.,[iii] although in third-party claims, the third party is not permitted to bring a bad faith claim directly against the insurer.[iv] An insurer’s common law duty to act in good faith is not restricted to an insurer’s duties under the insurance policy.[v] Rather, it is a general duty of care, requiring “fair dealing and equal consideration for the insured’s interests.”[vi] Unlike with IFCA, all of the regulations set forth in the WAC regarding communications, investigations, and settlement inform an insured’s common law duty of good faith.[vii]
This common law bad faith is a tort claim, where the insured must prove duty, breach, causation, and injury. However, in order to prove breach of the duty of good faith, an insured must prove an additional element, equivalent to the mens rea element in a criminal case—specifically, that the insurer’s breach was “unreasonable, frivolous, or unfounded.”[viii] This additional “unreasonable, frivolous, or unfounded” element is a question of fact that must be viewed in light of all of the circumstances that existed at the time of the alleged act.
Fortunately for insurers, this additional intent element can render a common law bad faith claim more difficult to establish for an insured. The insured cannot rest solely on a denial of coverage, refusal to defend, innocuous mistakes, or delay. The insured must additionally show that the denial was unreasonable, the refusal to defend was groundless, or the mistake/delay came about by some frivolous or unfounded reason.
Therefore, an insurer generally can stay clear of these claims as long as it “acts with honesty, bases its decisions on adequate information, and does not overemphasize its own interests.”[ix]
Consumer Protection Act (CPA)
The CPA also provides directives for insurers regarding claims practices (and all practices related to the trade). As with common law bad faith, an insurer’s duty extends to all first-party and third-party claims, but does not include a duty to third-party claimants.[x]
The CPA prohibits “unfair or deceptive acts or practices” in any industry of “trade or commerce,” and provides a means for victims of such practices to obtain civil damages.[xi] To establish a CPA claim, a plaintiff must establish five distinct elements: (1) unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to plaintiff in his or her business or property; (5) causation.
Specific to the insurance industry, a substantial list of enumerated “unfair practices” are spelled out in RCW 48.30 et seq.[xii] Additionally, Washington courts have held that a violation of IFCA, WAC 284-30-330, or common law bad faith not only constitutes an “unfair or deceptive act or practice,” but establishes the first three elements of a CPA claim. A single violation of these prohibitions, provided that the insured can show injury and causation, is enough to give rise to a CPA claim—which, like IFCA, permits a treble damages award. However, as with common law claims, insurers are not liable simply for good faith mistakes.
Steer clear of potential lawsuits by being upfront and candid with claimants, gathering and considering all relevant information, and stating the reasonable bases for claim, defenses, and coverage decisions.
[i] See The Three “I”ngredients to Staying “Reasonable” Under IFCA, December 19, 2016, http://www.davisrothwell.com/2016/12/19/the-three-ingredients-to-staying-reasonable-under-ifca/
[ii] See Unreasonable Denial of Coverage or Benefits Required for IFCA Acceptance, February 15, 2017, http://www.davisrothwell.com/2017/02/15/unreasonable-denial-of-coverage-or-benefits-required-for-ifca-acceptance/
[iii] See St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., 165 Wn.2d 122, 129-30, 196 P.3d 664, 667-668
[iv] Although a third party is not permitted to bring a bad faith claim for damages directly against the insurer, the State Insurance Commissioner may fine or suspend the license of an insurer deemed to have breached its duties to third parties. Specifically, violations of the standards for unfair claims settlement practices in WAC 284-30-400 are subject to the enforcement provisions of RCW 48.30.010 (allowing fines of $250 per violation) and also constitute a failure to comply with a regulation pursuant to RCW 48.05.140(1) (allowing refusal, suspension, or revocation of an insurer’s certificate of authority).
[v] Although breach of the insurance policy is evidence of bad faith. See Coventry Associates v. American States Ins. Co., 136 Wn.2d 269, 278-79, 961 P.2d 933, 937-38 (1998).
[vi] See Tank v. State Farm Casualty Co., 105 Wn.2d 381, 387, 715 P.2d 1133, 1137 (1986).
[vii] See Coventry, 136 Wn.2d at 277-78.
[viii] See Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 560, 951 P.2d 1124 (1998).
[ix] See Coventry, 136 Wn.2d at 280.
[x] But note that, under the CPA, the State Attorney General can bring a claim for an injunction if it finds a pattern of unlawful claims handling processes by an insurer.
[xi] See RCW 19.86.020
[xii] RCW 48.30 et seq. contains over 35 separate provisions defining specific unfair practices, full explanation of which would be impossible to cover here. Feel free to contact Davis Rothwell with any questions regarding your current claims practices to ensure that you are in compliance with Washington law.