There are few other areas of commercial law where a lawyer can correctly conclude a contract does not apply to a client’s claim, yet still obtain the contract’s protection. Granting coverage where none otherwise existed under the policy is only one of many tort remedies for liability policyholders1 in Washington when insurance bad faith is proved.

The Unfortunate “Bad Faith” Label

Insurance bad faith is an unfortunate label for this tort because the term almost inevitably evokes two misleading assumptions.

First, it suggests that a seriously flawed state of mind is required. The first two descriptions of bad faith in the Merriam-Webster Dictionary of Law are “intentional deception” and “dishonesty.” While deception and dishonesty are certainly bad faith, in Washington that level of intent or wrong is not required.

If a company’s acts in considering a claim do not have a reasonable basis, or the decisions are not reasonable, or the company did not give equal consideration to its policyholder’s interests, that is bad faith.

The company need only have intended the conduct; it need not intend any harm nor must it believe the conduct was improper.2 The real threshold is more akin to negligence than egregious intentional conduct.

The second problem with the term is that it is used both as a reference to the entire tort and as a reference to one of the elements of the tort, the wrongful conduct.

The elements of a bad faith action are: 1) the plaintiff had the correct relationship with the insurer; 2) the insurer’s conduct was not in good faith-improper under the definitions above; 3) the claimed wrongful conduct caused harm or damage; and, 4) the value or amount of damages.

What lawyers usually mean when they say an insurer acted in bad faith, is that the conduct was substandard. Even if true, that conclusion obscures that there are other hurdles to success, and if little or no harm was caused by the conduct there may be no bad faith claim. That ambiguity creates the answer to the riddle “when is bad faith not bad faith?”

It would thus ordinarily be helpful to adopt different terms for the cause of action and the element of wrongful conduct. But the bad faith term is so ingrained in our cases, literature and thinking that an attempt to utilize different labeling would probably cause more confusion than it would solve.

Two Basic Sources of Law

In Washington the tort of insurance bad faith is recognized under two theories, the common law and the Washing-ton Consumer Protection Act. The common law tort derives from the relationship of the parties and a long-standing state statute.3 Insurance has become mandatory in order to function in most of our society. After a claim starts, a policyholder is dependent on the company that holds the insurance-it is too late to get a different company. Thus the insurer has a fiduciary or quasi-fiduciary relationship to the policyholder.4

RCW 48.03.010 was adopted almost 60 years ago and states:

The business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters. Upon the insurer, the insured, their providers, and their representatives rests the duty of preserving inviolate the integrity of insurance.

The Washington Consumer Protec-tion Act allows private remedies.5 Claims under the CPA require: 1) an unfair or deceptive act or practice; 2) it occurred in the conduct of trade or commerce; 3) harm to the public interest; 4) harm or injury to property or business; and 5) a causal link between the act and the harm or damages.6

Insurance claims handling is, as a matter of law,7 conduct in a business.

The public interest requirement is satisfied per se in insurance cases because common law bad faith, if found, is automatically a violation of RCW 48.03.010 which contains a public interest statement by the legislature.8 That means contested issues are usually whether acts were wrongful, whether there was harm to property or business, and whether the acts caused that harm.

If an act violates the Regulations of the Insurance Commissioner in WAC 284-30, that is also automatically an unfair or deceptive act under the CPA. An argument is still occasionally advanced that proof of wrong exclusively via the regulations then requires separate proof of public interest since the state authorizing the regulations does not have a public interest statement.9 That ignores the statue’s coordination with RCW 48.03.010’s public interest statement, but no Supreme Court case has directly addressed the argument.

Differences in Common Law and the CPA

Aside from recoveries allowed, there are few differences between a common law bad faith action and a CPA claim. As reviewed above, while the elements of a CPA claim are inherently more technical, most problematic parts are satisfied per se in an insurance bad faith claim. Some still debate whether proof of breach of the Insurance Commissioner’s Regula-tions is automatically unreasonable conduct in a common law claim, but even if it only creates evidence of improper conduct, how often is a jury going to say such a violation was reasonable?

The real difference is the available remedies. The CPA specifically provides for injunctions and there is an award of fees even when nearly intangible harm occurs.10 When the principle goal is to enjoin insurer behavior, the CPA is the only sensible avenue since irreparable harm or the like are not required.11 When there is harm but no quantifiable damages, the CPA is also preferable because the damage threshold of a common law claim is usually higher. Discovery is broader for a CPA claim especially that related to advertising by insurers and conduct in other claims.

In most other settings, however, the common law claim is the better avenue. Damages are not limited to property. Whereas the CPA excludes emotional damages,12 common law bad faith claims include aggravation and distress damages.13 Further, common law bad faith generates a fee award because opponent bad faith is a recognized ground in equity for a fee award.14 Such common law fee awards include all costs in the fees15, unlike the CPA which excludes costs from a fee award.16

Finally, in common law bad faith cases, the biggest remedy can be the imposition of coverage by estoppel, even where the policy otherwise would not cover it. That signal remedy is discussed next. Most cases begin with both CPA and common law claims and often proceed to trial on both claims. In many instances simplification to one or the other might aid the trial presentation for a plaintiff.

The Defense - Presumed Harm and Coverage by Estoppel

Like all torts, the common law tort of insurance bad faith requires causation of some harm or some damage.17 This can be straightforward or problematic, depending on the setting. For instance, when a coverage issue exists concerning a liability claim, the majority of states allow a policyholder to select defense counsel for the reservation of rights defense and the insurer pays that counsel. In Washington, that is not true and the insurer retains the right to select defense counsel, subject to the conflict of interest requirements of RPC 1.7. In counter-balance, the Court also imposes enhanced duties and heightened scrutiny of the insurer and insurance defense counsel for the reservation of rights defense.18

If the insurer does not follow those requirements (which is bad faith), it can still be very difficult for policyholders to prove things would have been different because they can’t rerun the race. The Supreme Court recognized this problem and created a rebuttable presumption of harm and shifted the burden of proof. If the insurer can prove there was no prejudice from the conduct it wins. If the insurer cannot rebut that presumption, then an additional tort remedy is available, coverage by estoppel.19

Coverage by estoppel will also apply to bad faith decisions that the insurer does not have to defend a claim. If the insurer is not just wrong but wrong for some reason that meets the bad faith standard, then coverage by estoppel is available.20 Cases dealing with bad faith failure to defend suggest that the presumption of harm there is not rebuttable.21

Limits are No Limit-But What About this Estoppel?

As tort claims and not contract claims, damages in insurance bad faith cases are not restricted by the limits of liability in the policy. Indeed that is why the defense refers to these as extra-contractual claims. It is likely, though not certain, that coverage by estoppel in this bad faith context requires payment of all the underlying claim, including judgments that exceed the policy limits of the written coverage. The “coverage” referred to seems to be an obligation to pay a claim that was incorrectly handled, whatever its size. It could, however, be an enforcement of a “virtual policy” with all other limitations intact, such as the limits of liability.

It seems anomalous to impose coverage overriding the most basic sections of a policy, only to retain other restrictions like limits and even more so when lower limits are often an underlying reason for a half-hearted defense or other claim handling problems behind the bad faith that triggered the remedy in the first place. To date, the courts have not directly addressed this question, perhaps because the odds seem one-sided and because most of these claims also involve other conduct that would lead to recoveries beyond the limits anyway.

No Coverage by Estoppl in First Party Claims-Maybe

Coverage by estoppel is not available in first party bad faith cases, at least where the wrong was a bad faith investigation.22 Policyholders do recover fees and costs incurred by them to perform the coverage investigation including expert fees. The Washington Supreme Court discussed broad ideas that distinguish first party claims from the reservation of rights setting, suggesting that coverage by estoppel will not be available for any type of first party claim. However, other types of wrongdoing and the unique problems they can cause policyholders may well suggest to the Court that coverage by estoppel or some similar remedy is necessary. Only further cases can answer this question.

Role of Remedies

The Washington Supreme Court has been cognizant that Washington has no punitive damages and that it must look at compensatory remedies with care so that there is a significant disincentive to bad faith conduct and an incentive and differentiation for companies that act in good faith.23 It is therefore likely that the list of remedies available for insurance bad faith will continue to evolve.

Excess Liabilty Cases

A frequent type of insurance bad faith claim involves third party liability coverage when the claimant may recover, or has recovered, more than the limits. With only $25,000.00 required for auto insurance liability, it is common for accidents to cause bodily injury claims far greater than the limits. If such a case proceeds to judgment, through trial or a reasonable settlement involving a consent judgment, under contract law the insurer only pays its limits of liability, leaving the policyholder to pay any excess, thus the term, “excess case.”

If the insurer incorrectly handled that liability claim, and correctly doing so would have prevented any excess judgment, that demonstrates causation and the insurer owes all the excess judgment too, as well as any other economic and non-economic damages caused by the conduct.24

Consent Judgments

When judgments exceed limits, policyholder defendants can assign their bad faith claims against their insurers to the plaintiffs and receive in return a covenant not to execute on the judgments, if the other parties are willing.

That judgment defines a large component of the special damages that are recovered in a later bad faith suit. What should happen when apparent bad faith has occurred before trial, as it usually does? Our courts decided not to force a policyholder to suffer more damage including further distress to go through the trial before any assignment can occur, allowing a policyholder to settle by use of a stipulated judgment, covenant not to execute and an assignment of claims.25

Since the policyholder-defendant has less incentive to hold to a reasonable number for the judgment, the amount stipulated could be higher than otherwise might have been obtained at trial. For that reason, while the Supreme Court supported settlement and protection of policyholders, it also established judicial control of the amount of agreed judgments.

Reasonableness Hearings - They’re Back

Judicial control over the amount of a stipulated judgment is exercised through a reasonableness hearing, usually before the judge in the underlying suit. The judge is to use the same criteria previously established to determine if settlements were reasonable for joint and several liability purposes.26

If the amount is found reasonable, it becomes the measure of damages for that element in the bad faith case, unless the insurer can demonstrate collusion or fraud.27 If not, it appears whatever is the reasonable amount should be substituted and then used in the bad faith case.28

Collusion was not shown where parties worked together, not everything discussed was sent on to the insurer, and they settled the case in a way obviously detrimental to the insurer.29 The threshold for collusion or fraud appears high and seems to be the same as has always been required to set aside any other judgment.

Conduct such as an agreement to testify falsely, lies to the insurer, agreeing to a sham legal proceedings with no cross-examination and the like, appears necessary to create any question of fact regarding collusion,30 but that certainly is an issue that insurers will be raising in future appellate cases in Washington.

First Party Claims

Bad faith applies to first party claims too, including the failure to pay and for unreasonable delay in payment. It applies to underinsured motorist claims, despite the partially adversarial role of the insurer stepping into the shoes of the tort feasor.31 Like all other bad faith claims the policyholder recovers all damages proximately caused by the delay or the failure to pay, plus a reasonable fee award plus aggravation and distress.

The direct damages may often be less than liability claims but the fee awards are usually substantial since the effort required to prove the case is usually substantial. Aggravation and distress damages can also be significant in the eyes of jurors. They do not usually view these general damages through the same lens that creates such hostility to physical pain and suffering in bodily injury cases.

But Wait - There’s More

This article does not attempt to discuss the fascinating discovery, evidentiary and tactical issues that consume the preparation and trial of such cases. These subjects alone support whole seminars and newsletters. Suffice it to say there are peculiarities for these matters too that make the cases simultaneously interesting and demanding.

A Wide Open Field

Insurance bad faith claims are complex matters, simultaneously involving the facts of an underlying problem, the workings of the tort system (where liability claims are involved), an overlay of contract law and obligations, the details of what occurred in handling claims set against reasonable methods for claims handling, the facts of causation and the facts of damages, not to mention the personalities of the major players.

Washington’s law of bad faith is little more than 50 years old from its beginnings and the major opinions only started coming in the last 20 years. Despite what “Internet years” have done to our sense of what is new and old, that is a short time for an area of law to develop. There are many, many legal concepts to be established, refined, and rejected as well as glorious opportunities for imagination and creativity in shaping the legal and factual picture of a given bad faith case. It is interesting and emotionally rewarding work for lawyers young and old, and even more important, it is a protective tool for the insurance consumers of Washington. n

1 While the term “policyholder” is used throughout this article instead of the broader term “insured,” that is only to avoid confusion with the similar sounding term insurer. The same obligations of good faith extend to insureds of any type.

2 See WPI 320.02 (“The plaintiff is not required to prove that the insure acted dishonestly or intended to act in bad faith”).

3 Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 715 P.2d 1133 (1986).

4 Safeco Ins. Co. of America v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992) and Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 951 P.2d 1124 (1998).

5 RCW 19.86.090.

6 Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 719 P.2d 531 (1986).

7 Salois v. Mutual of Omaha Ins. Co., 90 Wn.2d 355, 581 P.2d 1349 (1978).

8 Hangman Ridge, supra at 791.

9 RCW 48.01.030.

10 Mason v. Mortgage America, Inc., 114 Wn.2d 842, 792 P.2d 142 (1990).

11 RCW 19.86.090 (“...may bring a civil action in the superior court to enjoin further violations...”).

12 Washington State Physicians Ins. Exchange & Ass’n v. Fisons Corp., 122 Wn.2d 299, 858 P.2d 1054 (1993).

13 Insurance is intended to preserve peace of mind so that bad faith automatically triggers damages for impairing that peace of mind. See Anderson v. State Farm Mut. Ins. Co., 101 Wn.App. 323, 2 P.3d 1029 (2000) and Coventry Associates v. American States Ins. Co., 136 Wn.2d 269, 282, 961 P.2d 933 (1998) (“Thus, the insurance contract brings the insured a certain peace of mind that the insurer will deal with it fairly and justly when a claim is made”).

14 McGreevy v. Oregon Mutual Ins. Co., 128 Wn.2d 26, 904 P.2d 731 (1995); Miotke v. Spokane, 101 Wn.2d 307, 338, 678 P.2d 803 (1984); Public Util. Dist. 1 v. Kottsick, 86 Wn.2d 388, 545 P.2d 1 (1976).

15 Panorama Village Condominium Owners Ass’n v. Allstate, 144 Wn.2d 130, 26 P.3d 910 (2000).

16 Nordstom v. Tampourlos, 107 Wn. 2d 735, 733 P.2d 208 (1987).

17 Safeco Ins. Co. of America v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992).

18 Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 715 P.2d 1133 (1986).

19 Safeco v. Butler, supra, at 394.

20 Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 951 P.2d 1124 (1998).

21 See Kirk, supra, at 564 and Truck Ins. Exchange v. Vanport Homes, Inc., 147 Wn.2d 751, 58 P.3d 276 (2002).

22 Coventry Associates v. American States Ins. Co., 136 Wn.2d 269, 961 P.2d 933 (1998).

23 See Butler, supra. See Kirk, supra, for example at 564-565. (“The coverage by estoppel remedy creates a strong incentive for the insurer to act in good faith, and protects the insured against the insurer’s bad faith conduct ...If we failed to apply the remedy acknowledged in Butler to this question, we would erode any incentive for an insurer to act in good faith”).

24 Hamilton v. State Farm Ins. Co. 83 Wn.2d 787, 523 P.2d 193 (1974) is an example.

25 Safeco Ins. Co. of America v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992), Besel v. Viking, 146 Wn.2d 730, 49 P.3d 887 (2002).

26 Glover v. Tacoma General Hosp., 98 Wn.2d 708, 658 P.2d 1230 (1983) and RCW 4.22.060.

27 Besel v. Viking, 146 Wn.2d 730, 49 P.3d 887 (2002) and Truck Ins. Exchange v. Vanport Homes, Inc., 147 Wn.2d 751, 58 P.3d 276 (2002).

28 Howard v. Royal Specialty Underwriting, Inc., 121 Wn.App. 372, 89 P.3d 265 (2004).

29 Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969).

30 See e.g. Damron v. Sledge, supra, and Andrade v. Jennings, 54 Cal.App. 4th 307, 62 Cal.Rptr.2d 787 (1997).