April 2012 Bar Bulletin
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April 2012 Bar Bulletin

Matsyuk: Insurers Must Pay Fair Share of Fees or Risk Bad Faith

By James R. Murray and Kristin C. Davis

 

An insurer is often in a position of power over its insured. Because of this imbalanced dynamic, an insurer has a duty to act in good faith when dealing with an insured. To do otherwise risks a bad faith claim. In Washington, this duty is recognized under common law and statute.

In February, the Washington Supreme Court recognized a new scenario that could give rise to a potential bad faith claim: specifically, where a personal injury protection (PIP) and liability insurer unfairly uses its position as the holder of funds over an insured-claimant to influence negotiations.

In Matsyuk v. State Farm Fire & Casualty Co.,1 the Washington Supreme Court reversed two consolidated cases, Matsyuk and Weismann. The 6-3 decision addressed three different issues, holding that: (1) equitable fee sharing is required between an insured and an insurer in PIP reimbursement situations; (2) PIP insured Karen Weismann was entitled to Olympic Steamship legal fees;2 and (3) Olga Matsyuk's previously dismissed bad faith claim against State Farm should be reinstated.

On the last issue, the Supreme Court explained that based on the disputed facts in Matsyuk's bad faith claim, State Farm may have potentially breached its "duty to treat its insured fairly, honestly, and in good faith" by improperly leveraging its position as the holder of liability settlement funds.3 The Supreme Court's mere recognition of the possible harm the insurer may have inflicted on the insured by refusing to accept a pro rata share of attorney fees is perhaps the most interesting holding of the case.

Before addressing Matsyuk's bad faith claim against State Farm, the court dealt with the issues common to the consolidated cases of Matsyuk and Weismann. Each case involved an individual, Matsyuk and Weismann respectively, who received both PIP benefits as an injured insured and then also reached a settlement under a liability policy as a claimant. In both cases, the liability insurers, which were also the PIP insurers, refused to pay a pro rata share of attorney fees the plaintiffs incurred in obtaining the liability settlement and PIP benefits, instead insisting on taking an offset for the full amount of the PIP benefits.

In Weismann, the Court of Appeals also reversed an award of Olympic Steamship fees to Weismann. In Matsyuk, the Court of Appeals upheld the trial court's decision to dismiss Matsyuk's bad faith claim. In both cases, the lower courts ruled that a PIP insured was not entitled to an offset of attorney fees and costs when the PIP insurer and liability insurer were one and the same, relying on the Court of Appeals' holding in Young v. Teti.4

The Supreme Court used the Weismann and Matsyuk cases as an opportunity to reaffirm the rule articulated in Mahler v. Szucs,5 and elaborated upon in Winters v. State Farm Mut. Auto. Ins. Co.6 and Hamm v. State Farm,7 that PIP insurers must share pro rata the legal fees incurred by an injured person in recovering a settlement and PIP benefits. Revisiting its prior holdings in Mahler, Winters and Hamm, the Supreme Court explained that the liability funds recovered under liability insurance in Matsyuk and Weismann created "common funds," triggering the equitable fee-sharing rule.

This so-called Mahler rule is an exception to the "American" rule that calls for each party to assume its own legal expenses. Under this exception, if insurers seek to recover an offset for their PIP payments, they must share in the plaintiff's attorney fees on a pro rata basis.

The results under the Mahler rule do not change if the PIP insurer and the liability insurer are the same because the PIP and liability policies represent "separate silos" for the purposes of recovery. Each policy offers particularized coverage, addressing a different need of the insured. To hold otherwise would force the claimant to bear the costs associated with protecting not only her own interests, but also those of the insurer, without the possibility of reimbursement from the insurer. This situation would create an incentive for insurers to always contest paying fees without incurring additional costs.

Although the Supreme Court only devoted three paragraphs to its analysis of Matsyuk's bad faith claim, the decision to reinstate the bad faith claim was significant. Matsyuk alleged that State Farm violated its duty to act in good faith by improperly refusing to effectuate a liability settlement unless Matsyuk gave up her independent claims against State Farm as a PIP insured. State Farm characterized the issue as asking Matsyuk to execute its standard liability release.

Amidst these disputed facts, the Court recognized a potential breach of State Farm's duty to treat its insured fairly, honestly and in good faith. Notably, though there was a lengthy dissent in Matsyuk, the dissent did not address whether the bad faith claim should be remanded. By recognizing that State Farm may have unfairly used its position as the holder of liability and PIP funds to negotiate a settlement, the Court gave teeth to its ruling that insurers cannot force an insured to take on all legal fees.

The Matsyuk decision provides valuable lessons for insurers and insureds alike. For insurers, there is no doubt that they have an obligation to share in legal fees on a pro rata basis when seeking an offset for PIP benefits. Refusing to share in attorney fees or forcing the release of a claim for those fees when negotiating liability settlements with PIP insureds may give rise to a bad faith claim. Insurers thus would be wise to exercise caution when negotiating offsets.

Insureds, even in the position of a claimant, have a right to be dealt with fairly. Insureds should not feel like they must forfeit a claim for legal fees to receive a liability settlement. Most importantly, insureds should always remain wary of insurers improperly using their position of power in a manner that may constitute bad faith.

Jim Murray is deputy leader of Dickstein Shapiro's 60-attorney Insurance Coverage Group (policyholders only).  Kristin Davis is an associate in Dickstein Shapiro's Washington, D.C. office and practices in the firm's Insurance Coverage Group.

1 Nos. 84686-3, 85012-7, 2012 Wash. LEXIS 119 at *26-28 (Feb. 9, 2012).

2 Under Olympic Steamship Co. v. Centennial Ins. Co., 117 Wn.2d 37, 54 (1991), "[a]n insured who is compelled to assume the burden of legal action to obtain the benefit of its insurance contract is entitled to attorney fees . . . ."

3 Matsyuk, 2012 Wash. LEXIS 119 at *27.

4 104 Wn. App. 721 (2001). The Court also took the opportunity to disapprove the Young decision, in light of its support for the Mahler, Winters and Hamm decisions.

5 135 Wn.2d 398 (1998).

6 144 Wn.2d 869, 31 P.3d 1164 (2001).

7 151 Wn.2d 303 (2004).

 

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