Bad Faith in Oregon? The Oregon Court of Appeals Cracks Open the Door…

By on February 4, 2022
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Oregon has for years been well known as a jurisdiction that generally does not recognize “bad faith” claims against insurers. This is because the Oregon courts have long suggested that such a tort claim by an insured generally exists only where the insurer has a “special relationship” with its insured, beyond the mere existence of an insurance policy. Such a relationship arises, for example, where the insurer agrees to defend its insured in a lawsuit brought by a third party. Unless that special relationship exists between the insured and insurer, the Oregon courts historically have limited an insured’s remedies against its insurer to contractual remedies.

Until now. In what appears to be a dramatic expansion of insurance coverage bad faith law in Oregon, the Oregon Court of Appeals held that an insurer’s alleged violation of Oregon claim handling regulations set forth in ORS 746.230(1) can provide the basis for a negligence per se claim against the insurer. Moody v. Oregon Community Credit Union and Federal Insurance Company, 317 Or. App. 233, ___ P.3d ___ (January 26, 2022). Resolving an issue of first impression in the policyholder’s favor, the Court concluded that the insurer’s breach of those regulations opened the door to tort damages, including the insured’s emotional distress damages caused by the insurer’s conduct.

The Moody case arose out of a claim for accidental death and a $3,000 life insurance policy. The insurer concluded there was no coverage and the insured sued, alleging breach of contract and negligence per se, the elements of which are that (1) defendant violated a statute; (2) plaintiff was injured as a result of the violation; (3) plaintiff was a member of the class of persons meant to be protected by the statute; and (4) the injury plaintiff suffered is of a type that the statute was enacted to prevent. At some point the insurer conceded coverage and paid the $3,000 policy limits.

The insurer moved to dismiss the negligence per se claim and the claim for emotional distress damages, arguing that well-established Oregon common law does not permit a policyholder to assert a negligence claim for what is essentially a breach of contract.

The insured opposed the motion, arguing that the insurer’s failure to conduct a reasonable investigation and settle the claim violated Oregon’s claim handling statute, thus providing the foundation for a negligence per se claim. That statute, ORS 746.230, prohibits the following actions by insurers during the claim handling process:

  1. Misrepresenting facts or policy provisions in settling claims;
  2. Failing to acknowledge and act promptly upon communications relating to claims;
  3. Failing to adopt and implement reasonable standards for the prompt investigation of claims;
  4. Refusing to pay claims without conducting a reasonable investigation based on all available information;
  5. Failing to affirm or deny coverage of claims within a reasonable time after completed proof of loss statements have been submitted;
  6. Not attempting, in good faith, to promptly and equitably settle claims in which liability has become reasonably clear;
  7. Compelling claimants to initiate litigation to recover amounts due by offering substantially less than amounts ultimately recovered in actions brought by such claimants;
  8. Attempting to settle claims for less than the amount to which a reasonable person would believe a reasonable person was entitled after referring to written or printed advertising material accompanying or made part of an application;
  9. Attempting to settle claims on the basis of an application altered without notice to or consent of the applicant;
  10. Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made;
  11. Delaying investigation or payment of claims by requiring a claimant or the claimant’s physician, naturopathic physician, physician assistant or nurse practitioner to submit a preliminary claim report and then requiring subsequent submission of loss forms when both require essentially the same information;
  12. Failing to promptly settle claims under one coverage of a policy where liability has become reasonably clear in order to influence settlements under other coverages of the policy;
  13. Failing to promptly provide the proper explanation of the basis relied on in the insurance policy in relation to the facts or applicable law for the denial of a claim…

ORS 746.230(1).

The trial court agreed with the insurer and dismissed the claims regarding negligence per se and emotional distress.

The Court of Appeals reversed, however, thereby opening the door to first-party and third-party “bad faith” claims against insurers in Oregon, even though the Court did not utter the words “bad faith”. Such claims would appear to now be permissible if an insurer violates any of the above claim handling provisions.

In reaching its conclusion the Court first held that an insurer’s violation of Oregon’s claim handling statute could support a claim for negligence per se. Because the plaintiff alleged violations of ORS 746.230(1)(d) and (f), and also alleged the applicability of the other negligence per se elements, the Court held that plaintiff was entitled to proceed against the insurer on her negligence theory.

In its analysis the Court of Appeals expended much effort in attempting to distinguish Oregon case law that, up until that point, had been relied upon by insurers to reject related claims by policyholders. See Abraham v. T. Henry Construction, 230 Or. App. 564, 217 P.3d 212 (2009), aff’d on other grounds, 350 Or. 29, 249 P.3d 534 (2011); Georgetown Realty v. The Home Insurance Co., 313 Or. 97, 831 P.2d 7 (1992); Farris v. U.S. Fidelity, 284 Or. 453, 587 P.2d 1015 (1978). Farris in particular has been cited by insurers in Oregon for years to keep bad faith claims at bay, but the Moody court concluded that the insurers read Farris too narrowly and that Farris did not foreclose the relief sought by the insured.

In addition to holding that the insured’s negligence claim could proceed, the Court of Appeals also held that plaintiff could seek emotional distress damages arising from the statutory violations, another theory that had previously appeared to have been rejected by the Oregon courts.

Given the break with longstanding precedent that appeared to foreclose such causes of action and damages, it seems likely that this case is heading to the Oregon Supreme Court, which will have the last word on this subject.

Filed under Bad Faith, Insurance

The Washington State Supreme Court Rules that Claims Adjusters May Not Be Held Personally Liable for Insurance Bad Faith

By and on December 17, 2019
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In 2018, the Washington Court of Appeals, Division 1, issued a ruling which rippled through the insurance community by finding that a claims adjuster may be held personally liable for the tort of insurance bad faith. However, in October 2019, the Washington State Supreme Court held that a claims adjuster may not be personally sued for insurance bad faith or for alleged violations of Washington’s Consumer Protection Act, RCW 19.86 et seq. (“CPA”). Keodalah v. Allstate Ins. Co., Slip. Op. No. 95867-0, 2019 WL 4877438 (Wash. Oct. 3, 2019).

In Keodalah v. Allstate Ins. Co., the Supreme Court ruled there is no statutory basis for a bad faith claim against an adjuster under RCW 48.01.030 because this statute does not create an implied cause of action. The Supreme Court also re-affirmed that a bad faith claim premised upon the common law may not be pursued against an adjuster, since an adjuster is outside the quasi-fiduciary relationship between the insurer and its insured. Further, the Supreme Court held that a CPA claim may not proceed against a claims adjuster as a matter of law, regardless of whether it is premised upon a per se regulatory violation or upon alleged bad faith.

In Keodalah, an insured brought suit against their insurer and its claims adjuster for the tort of insurance bad faith and the alleged violation of the CPA in connection with the insured’s claim for underinsured motorist (“UIM”) benefits. The insured alleged that the adjuster had improperly undervalued the UIM claim by relying on incorrect information regarding the subject auto accident. Id. In part, the insured premised his bad faith claim against the adjuster on RCW 48.01.030, which broadly provides “that all persons be actuated by good faith . . . in all insurance matters.” The Supreme Court thus evaluated whether RCW 48.01.030 created an implied cause of action for bad faith against a claims adjuster.

After analyzing the issue under the 3-prong “Bennett test”, the Supreme Court held that “RCW 48.01.030 does not create an implied cause of action for insurance bad faith.” This is because RCW 48.01.030 benefits the general public interest, rather than a specific, identifiable class of persons. RCW 48.01.030 also does not contain a specific enforcement mechanism which, the Supreme Court found, “suggests that the legislature did not intend to imply a cause of action based on violations of RCW 48.01.030.” Moreover, the Supreme Court reasoned that “[i]f we were to read the statute to imply a cause of action, by the statute’s plain language, such implied cause of action would apply against insureds as well. That is, insurers would be empowered to sue their insured … [which] would not be consistent with the legislature’s purpose in enacting the statute[.]” Accordingly, the Supreme Court held that a bad faith claim may not be pursued against a claims adjuster based upon a statutory violation of RCW 48.01.030.

Notably, the Keodalah decision also re-affirmed the Supreme Court’s prior rulings that a bad faith claim premised upon the common law may not be brought against anyone other than an insurer. In citing its ruling in Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1333 (1986), the Supreme Court in Keodalah stated that “this court has limited bad-faith tort claims to the context of the insurer-insured relationship[.]” This is because such claims are premised upon “the fiduciary relationship existing between the insurer and insured.” Keodalah, at *15 – 16, n. 6 (quoting Tank, 105 Wn.2d at 385). The Supreme Court found that no such fiduciary relationship exists with respect to a claims adjuster, and that limiting common law bad faith claims to actions against an insurer was consistent with a long line of Washington precedent. See, e.g., St. Paul Fire & Marine Ins. Co. v Onvia, Inc., 165 Wn.2d 122, 130 n.3, 196 P.3d 664 (2008).

Finally, the Supreme Court held that a CPA claim may not be pursued against a claims adjuster, regardless of whether the claim is premised upon alleged bad faith or upon a per se violation of Washington’s regulation concerning unfair claims settlement practices, WAC 284-30-330. By its terms, WAC 284-30-330 only applies to “unfair or deceptive acts or practices of the insurer.” Keodalah, at *14 (citing WAC 284-30-330) (emphasis original). Moreover, because “RCW 48.01.030 does not itself provide an actionable duty” for bad faith, it cannot form the basis for CPA liability against an adjuster. The Supreme Court explained that it has “limited CPA claims based on breach of the statutory duty of good faith” to the insurer because it is the insurer – not the adjuster – who owes a quasi-fiduciary duty to the insured. As a result, the Supreme Court held that “[b]ecause Keodalah claims a breach of the duty of good faith by someone outside the quasi-fiduciary relationship, his CPA claim based on RCW 48.01.030 was properly dismissed.”

Filed under Bad Faith, Insurance

Colorado Supreme Court Issues Decisions on Statute of Limitations for Statutory Bad Faith Claims and the Implied Waiver of Attorney-Client Privilege

By on June 13, 2018
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The Colorado Supreme Court has been busy the past two weeks, issuing a couple rulings that should be of interest to the insurance industry:

Statute of Limitations for Bad Faith Statute: In Rooftop Restoration, Inc. v. American Family Mutual Insurance Co., 2018 CO 44 (May 29, 2018), the Colorado Supreme Court held that the one-year statute of limitations that applies to penalties, does not apply to claims brought under C.R.S. 10-3-1116, Colorado’s statutory cause of action for unreasonable delay or denial of benefits. Section 10-3-1116 provides that a first-party claimant whose claim for payment of benefits has been unreasonably delayed or denied may seek to recover attorney fees, costs, and two times the covered benefit, in addition to the covered benefit. A separate Colorado statute, CRS 13-80-103(1)(d) provides a one-year statute of limitations for “any penalty or forfeiture of any penal statutes.” To arrive at the conclusion that the double damages available under section 10-3-1116 is not a penalty, the Court looked at yet another statutory provision, governing accrual of causes of action for penalties, which provides that a penalty cause of action accrues when “the determination of overpayment or delinquency . . . is no longer subject to appeal.” The Court stated that because a cause of action under 10-3-1116 “never leads to a determination of overpayment or delinquency . . . the claim would never accrue, and the statute of limitations would be rendered meaningless.” Para. 15. Presumably, the default two-year statute of limitations, provided by CRS 13-80-102(1)(i), will now be found to apply to causes of action seeking damages for undue delay or denial of insurance benefits.

Implied Waiver of Attorney Client Privilege: On June 4, 2018, the Court held that the attorney-client privilege was not impliedly waived when former counsel for State Farm submitted an affidavit refuting factual allegations of plaintiff. In In re Plaintiff: State Farm Fire & Cas. Co. v. Defendants: Gary J. Griggs & Susan A. Goddard, 2018 CO 50, a State Farm adjuster had testified that a medical lien was in the amount of $264,075. State Farm’s attorney at the time then discovered that the lien was actually in the amount of $264.75. While the attorney was investigating the source of the error, plaintiff’s counsel moved to disqualify State Farm’s counsel (based on the attorney’s previous attorney-client relationship with the firm representing the plaintiff). The court disqualified the attorney. The new attorney for State Farm then disclosed the correct lien amount to plaintiff, and noted that the service provider was the source of the error. Plaintiff then sought sanctions against State Farm, in the form of a directed verdict on her bad faith claim, alleging that State Farm deliberately and intentionally concealed the correct lien information. In response, State Farm submitted an affidavit from the former attorney, which stated that at the time of his disqualification, he was still investigating the source of the lien error. Plaintiff argued that by submitting the attorney affidavit, State Farm put at issue the attorney’s advice. The Supreme Court disagreed, explaining that the mere possibility that privileged information may become relevant in a lawsuit is not enough to imply a waiver. Rather, the party asserting waiver “must show that the client asserted a claim or defense that depends on privileged information.” Para. 18. The Supreme Court found that the attorney affidavit did not refer to any claims or defenses, did not refer to advice provided by the attorney to State Farm, and was not offered in support of a claim or defense, but rather to rebut plaintiff’s factual argument. As such, the Court concluded that “State Farm’s submission of the [attorney] affidavit did not place privileged communications at issue and, therefore, did not result in an implied waiver of the attorney-client privilege.” Para. 24.

If there are any questions about either of the above cases or if you assistance with any insurance coverage, bad faith, or mountain states litigation issues, please contact jarnett-roehrich@grsm.com.

Filed under Attorney-Client Privilege, Bad Faith, Statute of Limitations

San Diego Team Prevails with Motion to Dismiss First Amended Complaint without Leave to Amend on behalf of Multi-National Insurance Company

By and on May 1, 2018
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On March 6, 2018, the United States District Court for the Southern District of California granted the firm’s client, a multi-national insurance company, the motion to dismiss the plaintiff’s first amended complaint without leave to amend. The motion was filed by Gordon Rees Scully Mansukhani San Diego partner Matthew G. Kleiner and senior counsel Jordan S. Derringer.

The plaintiff originally filed her complaint alleging causes of action for breach of contract, bad faith, breach of fiduciary duty and fraud based upon negligent misrepresentation and concealment. The plaintiff’s claims arose out of the insurer’s denial of a claim for accidental death benefits in connection with the death of her husband resulting from a plane crash. The plaintiff alleged that the insurer client provided inadequate notice of an aviation exclusion that was present in a replacement insurance policy and allegedly broader than an aviation exclusion in her prior policy issued by another insurer. According to the plaintiff, the exclusion was not clear and conspicuous and was unconscionable. The plaintiff further stated that the client’s letter advising that her policy was similar to her previous insurance policy was incorrect and therefore, Gordon & Rees’s client breached its fiduciary duty to the plaintiff. The plaintiff’s contention regarding the letter also formed the basis of the negligent misrepresentation and concealment causes of actions.

After Gordon & Rees’s attorneys were successful in filing a motion to dismiss, the plaintiff filed a first amended complaint setting forth identical causes of action but alleging that Gordon & Rees’s client’s policy included a sickness exclusion that was not present in her previous insurance company’s policy and that this policy contained a non-contributory benefit that was not available under the current policy. Gordon & Rees attorneys again filed a motion to dismiss the first amended complaint arguing that the plaintiff failed to correct the defects from the original complaint and that the additional allegations regarding the presence of a sickness exclusion and the lack of a non-contributory benefit were irrelevant as the plaintiff’s claim was not denied on the sickness exclusion and she failed to prove entitlement to any benefits under the her previous policy.

The trial court granted Gordon & Rees’s motion to dismiss the amended complaint without leave to amend and held that the aviation exclusion in the policy was plain, clear and conspicuous. The court also found that the exclusion was not unconscionable and that the notice of change of insurance was plain, clear and conspicuous because the aviation exclusion in the client’s policy was not a reduction in coverage because the plaintiff was not entitled to benefits under her current or previous policy. As the plaintiff’s breach of contract cause of action failed, the plaintiff was unable to state a cause of action for bad faith. The court held that the plaintiff failed to state a cause of action for breach of fiduciary duty because generally, an insurer is not a fiduciary of the insured and the plaintiff failed to demonstrate that the insurer assumed a higher duty of care or knowingly undertook to act on behalf of or for the benefit of the plaintiff. With respect to the plaintiff’s fraud claims, the court held that the insurer’s statement that the policies were similar was not a misrepresentation and, even if it were, the plaintiff’s reliance thereon was not justified. The court also held that the plaintiff did not sustain any damages in connection with these claims because she could not prove an entitlement to benefits under the previous insurance company’s policy. Finding that leave to amend would be futile, the court dismissed the first amended complaint with prejudice and ordered judgment in favor of Gordon & Rees’s client.

To read the court’s full decision, please click here.

Filed under Bad Faith, Breach of Contract

Insurance Adjuster Employed by an Insurance Company May Be Liable for Bad Faith in Washington

By and on April 17, 2018
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As a general proposition, an adjuster working for an insurance company is not subject to personal liability under the common law or under state insurance laws for conduct within the scope of his/her employment. Recently, however, the Washington Court of Appeals, Division One, in Keodalah v. Allstate Ins. Co., 2018 Wash. App. LEXIS 685 (2018), held that an individual adjuster, employed by an insurance company, may be held liable for bad faith and violation of the Washington Consumer Protection Act (“CPA”).

In Keodalah, Moun Keodalah (“Keodalah”) was involved in an accident with a motorcycle, after which Keodalah sought uninsured/underinsured motorist (“UIM”) benefits of $25,000 under his auto policy issued by Allstate. Allstate offered $1,600 based on an assessment that Keodalah was 70 percent at fault, even though the Seattle Police Department and the accident reconstruction firm hired by Allstate concluded that the accident was caused by the excessive speed of the motorcyclist. When Keodalah questioned Allstate’s evaluation, Allstate increased its offer to $5,000. Thereafter, Keodalah sued Allstate for UIM benefits.  Despite having the police investigation report, its own accident reconstruction firm’s findings, and the 30(b)(6) deposition testimony of the Allstate adjuster, who acknowledged that Keodalah had not run a stop sign and had not been on his cell phone at the time of the accident, Allstate maintained its position that Keodalah was 70 percent at fault. At trial, the jury determined that the motorcyclist was 100 percent at fault and awarded Keodalah $108,868.20 for his injuries, lost wages, and medical expenses.

Keodalah then filed a second lawsuit against Allstate and the adjuster, including claims under the Insurance Fair Conduct Act (“IFCA”), the CPA, as well as for insurance bad faith. The adjuster moved to dismiss the claims against her under Rule 12(b)(6). The trial court granted the motion but certified the case for discretionary review. First, the court held that there was no private cause of action for violation of a regulation under the IFCA, following the recent Washington Supreme Court decision in Perez-Cristantos v. State Farm Fire & Cas. Ins. Co., 187 Wn.2d 669 (2017).

The Court of Appeals then addressed whether an individual insurance adjuster may be liable for bad faith and for violation of the CPA. The court looked to the Revised Code of Washington (“RCW”) 48.01.030, which serves as the basis for the tort of bad faith. RCW 48.01.030 imposes a duty of good faith on “all persons” involved in insurance, including the insurer and its representatives, and a breach of such duty renders a person liable for the tort of bad faith. The term “person” is defined as “any individual, company, insurer, association, organization, reciprocal or interinsurance exchange, partnership, business trust, or corporation.” RCW 48.01.070.  Because the adjuster was engaged in the business of insurance and was acting as an Allstate representative, she had the duty to act in good faith under the plain language of the statute. As a result, the Court of Appeals held that the adjuster can be sued for bad faith.

With respect to the CPA claim, the court noted that the CPA prohibits “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.” RCW 19.86.020. The Court of Appeals, Division One, previously ruled that under “settled law,” the “CPA does not contemplate suits against employees of insurers.” International Ultimate, Inc. v. St. Paul Fire & Marine Ins. Co., 122 Wn. App. 736, 87 P.3d 774 (Wash. App. 2004). There, the court held that to be liable under the CPA, there must be a contractual relationship between the parties and because there is no such relationship between an employee of the insurer and the insured, the employee cannot be liable for a CPA violation. The court in Keodalah, however, rejected the adjuster’s reliance on International Ultimate, holding that the prior decision was without any supporting authority, and it was inconsistent and irreconcilable with the Washington Supreme Court case of Panag v. Farmers Ins. Co. of Wash., 166 Wn.2d 27, 208 P.3d 885 (2009) (Washington Supreme Court declined to add a sixth element to the Hangman Ridge elements that would require proof of a consumer transaction between the parties). It appears that the holding in International Ultimate may be losing ground, as at least two federal district court cases have questioned the validity of that case. Lease Crutcher Lewis WA, LLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2009 U.S. Dist. LEXIS 97899, *15 (W.D. Wash. Oct. 20, 2009), (statement at issue in International Ultimate “is unsupported by any citation or analysis); Zuniga v. Std. Guar. Ins. Co., 2017 U.S. Dist. LEXIS 79821, *5-6 (W.D. Wash. May 24, 2017) (pointing out at least two problems with the statement at issue in International Ultimate).

While the adjuster’s actions in Keodalah appear to have been extreme, presumably policyholders in Washington will rely on this case to sue an insurance company’s adjusters in their individual capacities for bad faith and CPA violations. The court’s holding may have far reaching consequences. For example, will insurers need to appoint separate counsel for their adjusters when the adjusters are personally named in litigation? How will this affect the practice of removing cases from state to federal court? To the extent an insured wants to destroy diversity jurisdiction for its out-of-state insurer, it may choose to name an in-state adjuster, which would limit the insurer to Washington State Court when litigating coverage issues. This is an extremely alarming development for insurers and their employee adjusters in Washington State, who should take this as a reminder to be vigilant in ensuring good faith claims handling and the aggressive defense of bad faith claims.

Filed under Bad Faith, Commercial General Liability

Washington Supreme Court Denies Reconsideration of Its Decision to Apply the Efficient Proximate Cause Rule to a Third-Party Liability Policy

By and on August 29, 2017
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We previously reported the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., 188 Wn.2d 171, 393 P.3d 748 (2017), in which the Court applied the efficient proximate cause rule to a third-party liability policy to find a duty to defend.

To recap, Washington law requires insurers to assess and investigate coverage under first-party insurance policies by applying the efficient proximate cause analysis. Until Xia, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But the Washington Supreme Court’s decision in Xia changed that by holding that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy.

The issue in Xia was whether the pollution exclusion applied to relieve ProBuilders of its duty to defend a claim against the insured alleging that carbon monoxide was released into the claimant’s house through a defectively installed vent. ProBuilders denied coverage to the insured contractor, in part, under the pollution exclusion. The Washington Supreme Court held that while ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

Soon after the Washington Supreme Court’s decision, ProBuilders filed a motion asking the Court to reconsider its decision. However, on August 17, 2017, the Washington Supreme Court denied the motion, leaving in place the holding that insurers must take the efficient proximate cause rule when analyzing coverage under third-party policies.

As discussed in our earlier post, the efficient proximate cause rule applies “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012). “If the initial event, the ‘efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless of whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994).

Insurers must be extremely cautious when assessing the duty to defend and an exclusion that could potentially preclude coverage. Under Xia, liability insurers must examine the underlying complaint very carefully to determine whether there could potentially be multiple causes of a loss, and if so, which cause is the initiating cause. If the initiating cause is potentially a covered event, then there may be coverage and the insurer must provide a defense under reservation of rights in order to minimize bad faith exposure.

If you would like more information on the efficient proximate cause rule in Washington, please feel free to contact Sally S. Kim (sallykim@grsm.com or 206-695-5147) or Stephanie Ries (sries@grsm.com or 206-695-5123).

Filed under Bad Faith, Commercial General Liability, Duty to Defend, First Party Policy, Pollution Exclusion

The Ninth Circuit Resolves Split in Authority, Holds that Only Insureds Under First-Party Policies Can Bring Claims Under Washington’s IFCA

By and on July 31, 2017
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Washington’s Insurance Fair Conduct Act (“IFCA”) provides insureds with a statutory cause of action against their insurers for wrongful denials of coverage, in addition to a traditional bad faith cause of action. Unlike a bad faith cause of action, the IFCA allows for enhanced damages under certain circumstances. Under the language of the statute, “any first party claimant to a policy of insurance” may bring a claim under IFCA against its insurer for the unreasonable denial of a claim for coverage or payment of benefits. There has been a split of authority in Washington among both the state appellate courts and federal district courts regarding whether the term “first-party claimant” refers only to first-party policies (i.e., a homeowner’s policy or commercial property policy) or whether it refers to insureds under both first-party and liability policies (e.g., CGL policies which cover the insured’s liability to others). The IFCA expressly defines the phrase “first-party claimant” as “an individual, … or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract.”

The Washington Court of Appeals, Division One, held that a “first-party claimant” means an insured under both first-party and liability policies (Trinity Universal Ins. Co. of Kansas v. Ohio Casualty Ins. Co., 176 Wn.App. 185 (2013)), but Division Three held that the IFCA applies exclusively to first-party insurance contracts (Tarasyuk v. Mutual of Enumclaw Insurance Co., 2015 Wash. App. LEXIS 2124 (2015)).

In the federal courts, the majority of decisions from the Western District of Washington have held that an insured with third-party coverage or first-party coverage can be a “first-party claimant” under IFCA. Navigators Specialty Ins. Co. v. Christensen, Inc., 140 F. Supp. 3d 11097 (W.D. Wash. Aug. 3, 2015 ) (Judge Coughenour); City of Bothell v. Berkley Regional Specialty Ins. Co., 2014 U. S. Dist. LEXIS 145644 (W.D. Wash. Oct. 10, 2014) (Judge Lasnik); Cedar Grove Composting, Inc. v. Ironshore Specialty Ins. Co., 2015 U. S. Dist. LEXIS 71256 (W.D. Wash. June 2, 2015) (Judge Jones); Workland & Witherspoon, PLLC v. Evanston Ins. Co., 141 F.Supp.3d 1148 (E.D. Wash. Oct. 29, 2015) (Judge Peterson). These decisions held that any insured who has a right to file a claim under the insurance policy is a “first-party claimant” under the IFCA regardless of whether the policy provides first-party or third-party coverage.

However, Judge Pechman of the Western District of Washington ruled that an insured with third-party coverage is not a “first-party claimant” under IFCA in Cox v. Continental Casualty Co., 2014 U. S. Dist. LEXIS 68081 (W.D. Wash. May 16, 2014) and two subsequent cases. In Cox, Judge Pechman dismissed plaintiff’s IFCA claim on the ground that the insurance policy was a “third-party policy,” i.e. a third-party liability policy, and therefore the insured (who assigned his claim to the plaintiffs) was not a “first-party claimant.” The Ninth Circuit Court of Appeals recently affirmed the Cox decision on appeal, effectively resolving the split of authority in the federal courts in favor of a more limited interpretation of the IFCA. Cox v. Continental Casualty Co., 2017 U.S. App. 11722 (9th Cir. June 30, 2017).

Those watching this issue and looking for a reasoned analysis resolving the split of authority among the federal district courts in Washington will be disappointed, as the Ninth Circuit provided no basis for its holding on the issue, not even a recognition of the split among the courts. On the issue, the Court merely stated “[t]he policy in question is not a first party policy; thus, the Plaintiffs, standing in [the insured’s] shoes, cannot be a first party claimant.” The court’s failure to provide its reasoning for this holding is surprising, given that the parties addressed the split of authority in their briefs. Nonetheless, insurers should take note of this important decision limiting the scope of the IFCA in Washington’s federal courts.

Filed under Appellate, Bad Faith, Commercial General Liability, First Party Policy

Washington Supreme Court Applies the Efficient Proximate Cause Rule to Third Party Liability Policy to Find a Duty to Defend

By on May 11, 2017
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The efficient proximate cause rule is one of the more confusing analyses that an insurance company must undertake when investigating certain coverage issues under first party insurance policies. And until now, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But that has now changed with the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., Case No. 92436-8 (April 27, 2017). In Xia, the Washington Supreme Court not only ruled that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy, but that ProBuilders acted in bad faith by failing to do so, despite no prior precedent for application of the rule in a CGL coverage analysis.

In Xia, the claimant purchased a new home constructed by Issaquah Highlands 48 LLC (“Issaquah”), which was insured under a CGL policy issued by ProBuilders. The claimant fell ill soon after moving in due to inhalation of carbon monoxide, caused by improper installation of an exhaust vent.

The claimant notified Issaquah about the issue, and Issaquah notified ProBuilders. ProBuilders denied coverage under the pollution exclusion and a townhouse exclusion. The claimant filed a lawsuit, which Issaquah then settled by a stipulated judgment of $2 million with a covenant not to execute and an assignment of rights against ProBuilders. The claimant filed a declaratory judgment action against ProBuilders for breach of contract, bad faith, violation of the Consumer Protection Act and the Insurance Fair Conduct Act.

At the trial court level, ProBuilders won summary judgment on the townhouse exclusion. Division One of the Washington Court of Appeals reversed in part, finding that the pollution exclusion applied, but not the townhouse exclusion.

The Washington Supreme Court accepted review to determine whether the pollution exclusion applied to relieve ProBuilders of its duty to defend. The Court held that even though ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

The application of the efficient proximate cause rule to CGL policies in Washington is troublesome for insurers. The Washington courts have long held in cases involving first party policies that under the efficient proximate cause rule, “[i]f the initial event, the “efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994). Also, the efficient proximate cause rule applies only “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012).

In Xia, the Court noted that like any other covered peril under a general liability policy, an act of negligence may be the efficient proximate cause of a particular loss. “Having received valuable premiums for protection against harm caused by negligence, an insurer may not avoid liability merely because an excluded peril resulted from the initial covered peril.” Xia at *14. The Court stated:

…it is clear that a polluting occurrence happened when the hot water heater spewed forth toxic levels of carbon monoxide into Xia’s home. However, by applying the efficient proximate cause rule, it becomes equally clear that the ProBuilders policy provided coverage for this loss. The polluting occurrence here happened only after an initial covered occurrence, which was the negligent installation of a hot water heater that typically does not pollute when used as intended.

Xia at *17.

Justice Madsen took issue with the majority decision in a dissenting opinion, specifically with respect to a finding of bad faith when no other case prior to this decision had ever applied the efficient proximate cause rule to CGL policies. Justice Madsen also disagreed with the majority in extending the application of the efficient proximate cause rule to CGL policies when this Court specifically declined to do so in the earlier case of Quadrant Corp. v. American States Insurance Co., 154 Wn.2d 165, 110 P.3d 733 (2005).

The State of Washington unfortunately has been historically unkind to insurers on the duty to defend, and the Xia decision only further cements that reputation.

If you would like more information on the efficient proximate cause rule in Washington, please feel free to contact Sally S. Kim at sallykim@gordonrees.com or (206) 695-5147.

Filed under Bad Faith, Commercial General Liability, Duty to Defend, First Party Policy, Pollution Exclusion

WASHINGTON SUPREME COURT HOLDS THAT INSURANCE FAIR CONDUCT ACT IS ONLY APPLICABLE WHERE THERE HAS BEEN A DENIAL OF COVERAGE AS OPPOSED TO A VIOLATION OF INSURANCE REGULATIONS

By on February 7, 2017
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On February 2, 2016, the Washington Supreme Court provided some much needed guidance on what actions by an insurer will support a claim under Washington’s Insurance Fair Conduct Act (“the IFCA”). Perez-Crisantos v. State Farm Casualty Co., ___ P.3d ___ (No. 92267-5, Feb. 2, 2017). Although the IFCA was enacted in 2007 and is generally focused on preventing unreasonable conduct by insurers, the federal district courts in Washington have disagreed on what a plaintiff must show to maintain a cause of action. See Langley v. GEICO Gen. Ins. Co., 2015 U.S. Dist. LEXIS 26079 (E.D. Wash. Feb. 24, 2015); Cardenas, et al. v. Navigators Ins. Co., 2011 U.S. Dist. LEXIS 145194 (W.D. Wash. 2011).  The Washington Supreme Court has not spoken on the issue until now.

Unlike a Washington common law bad faith action, the IFCA allows attorney fees and treble damages for a violation, one of the few instances in Washington where punitive damages are permitted. Unfortunately the language of the primary statute of the IFCA, RCW 48.30.015, is less than clear and has been kindly referred to as “vexing” by a judge in the Eastern District of Washington. Workland & Witherspoon v. Evanston Ins. Co., 141 F. Supp. 3d 1148, 1155 (E.D. Wash 2015).

The dispute centers on whether a violation of certain state insurance regulations, such as where an insurer does not respond to certain communications within 10 days, is enough to support an IFCA cause of action, or whether an insurer must unreasonably deny a claim for coverage or payment of benefits for an IFCA cause of action to exist. In a somewhat rare victory for insurers in the Washington appellate courts, the Washington Supreme Court sided with the insurer and held that there must actually be an actual denial of coverage for the insured to move forward with an IFCA lawsuit.

The case involved an underinsured motorist claim where State Farm paid PIP benefits but balked at paying the additional amounts the plaintiff demanded; an arbitrator subsequently ruled in favor of the plaintiff. The trial court dismissed plaintiff’s IFCA lawsuit on summary judgment and the Washington Supreme Court accepted direct review.

In ruling in State Farm’s favor, the court held that RCW 48.30.015 is ambiguous and therefore turned to its legislative history, including the ballot title that was put before Washington’s voters in 2007. The court concluded that the IFCA was meant to apply to denials of coverage as opposed to violations of the insurance regulations. In doing so it rejected the position of the Washington Pattern Jury Instruction committee, which had developed a jury instruction that contemplated the situation where the IFCA cause of action was based only upon a violation of the insurance regulations.

After Perez-Crisantos, it is now clear that violations of the Washington insurance regulations are relevant to an insured’s claimed damages under the IFCA, but such alleged violations by themselves are insufficient to pursue an IFCA cause of action. For such a cause of action to exist, the insured must show an actual denial of coverage.

Filed under Appellate, Auto, Bad Faith, Unfair Insurance Practices

DRI Publishes 4th Edition of Insurance Bad Faith: A Compendium of State Law

By on December 8, 2015
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The Defense Research Institute recently published Insurance Bad Faith: A Compendium of State Law with Gordon & Rees partner Asim Desai and senior counsel Randall Berdan serving as co-editors in chief. Partner Leon Silver and senior counsel Andy Jacob authored the Compendium’s Arizona chapter, and senior counsel Laura Ryan authored the Nevada chapter.
This is the fourth edition of the Compendium, which addresses the state of the law in all areas of Insurance Bad Faith including theories of liability, damages, defenses and direct actions, among others in each of the 50 states as well as the District of Columbia, Puerto Rico, the Virgin Islands, and Canada. State level authors, and regional editors were selected based upon their breadth and depth of experience and knowledge in defending against bad faith actions.
To obtain copies of DRI’s Compendium, please click here.

Filed under Bad Faith

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