Meaning of "Actual Damages" Under IFCA Certified to Washington Supreme Court

Washington's Insurance Fair Conduct Act provides that "after finding that an insurer has acted unreasonably in denying a claim for coverage or payment of benefits or has violated [one of the claim handling rules stated in WAC 284-30-330 through 284-30-380], [the court may] increase the total award of damages to an amount not to exceed three times the actual damages." But IFCA does not offer any guidance as to how to properly measure "actual damages." While that may often be a common sense question, the facts presented in Morella v. Safeco Ins. Co., 2013 U.S. Dist. LEXIS 53255 (W.D. Wash. April 12, 2013), has led Judge Robert Lasnik to ask the Washington Supreme Court for guidance. 

The IFCA claim arose from an uninsured motorist claim in which Safeco offered only $1,500 in settlement and was later ordered to pay $62,000 at arbitration mandated by the policy.  Safeco paid the award but the insured filed an IFCA claim on that grounds that Safeco had violated WAC 284-30-330(7)3 which provides that it is an unfair or deceptive practice for an insurer to "[c]ompel[] a first party claimant to initiate or submit to litigation, arbitration, or appraisal to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in such actions or proceedings." The insured argued that its actual damages are the full $62,000 awarded at arbitration. Safeco, on the other hand, argued that its prior payment of the $62,000 precluded the court from treating the full arbitration award as the proper measure of "actual damages." Judge Lasnik acknowledged Safeco's argument. But he also pointed out that IFCA's legislative history reflects the Washington legislature's desire to motivate insurers to treat their insured's fairly and that the policy's arbitration provision had prevented the insured from pursuing his IFCA claim until after he resolved the proper measure of his damages.     

Finding that this was an issue of first impression, Judge Lasnik  elected to seek guidance and certified the following question to the Washington Supreme Court:

How are "actual damages" calculated or defined under the Insurance Fair Conduct Act (RCW 48.30.015) where, as in this case, the insured obtained a $62,000 arbitration award in his favor prior to initiating the IFCA action in state court?

Cedell Applied to Liability Insurance Bad Faith Dispute

Earlier this year, the Washington Supreme Court held, in Cedell v. Farmers Ins. Co., 295 P.3d 239, 246, 176 Wn.2d 686 (2013), that when an insured brings a bad faith claim, attorney-client privilege and work  product protections are presumptively inapplicable to the insurer's claim-adjustment communications. Cedell involved first party (property) coverage and the Washington Supreme Court's decision could be construed to apply only to first party insurance. But in an April 12, 2013 opinion (.pdf), federal district court judge Richard Jones ruled that Cedell applies with equal force to third party liability insurance. Judge Jones offered the following reasoning:

The Cedell court grounded its ruling in the quasi-fiduciary duty of an insurer to its insured, along with the public policy interest in regulating the business of insurance. 295 P.3d at 239, 176 Wn.2d 686. The latter consideration is just as important in a third-party claim. As to the former, the "duty of good faith is applicable to both first-party and third-party coverage." St. Paul Fire & Marine Ins. Co. v. Onvia, 165 Wn.2d 122, 196 P.3d 664, 668 (2008).

Great New D&O and Professional Liability Update

For anyone interested in recent developments in D&O and professional liability coverage, Troutman Sanders just published a great new 2012 year in review. The 22-page document quickly summarizes significant decisions from around the country.

Insurers May Not Recoup Defense Costs Incurred While Defending Under Reservation of Rights

Today, in the latest chapter of the duty to defend battle between National Surety Corp. and Immunex (.pdf), the Washington Supreme Court held in a 5-4 decision that “insurers may not recoup defense costs incurred under a reservation of rights defense while the insurer’s duty to defend is uncertain.” The Supreme Court declined to follow California and other jurisdictions that have allowed for recoupment. 

In a decision written by Justice Debra Stephens, the majority reasoned that its decision was supported by the National Surety policy because the policy did not expressly provide for recoupment. The majority also stated that equitable considerations do not require recoupment because insurers get real benefit by defending under reservation as it insulates them from later claims of bad faith and coverage by estoppel. 

In what may prove to be a small concession to insurers, the majority did leave open the possibility that an insurer may be relieved of at least a portion of its obligation where an insured fails to timely tender a claim and the delay results in substantial prejudice to the insurer. The court remanded the case back to the trial court to resolve the prejudice issue. 

Writing for the dissent, Justice Charles Wiggins criticized the majority for ignoring basic considerations of fairness by adopting a bright line prohibition against recoupment. Justice Wiggins argued that the majority’s approach will needlessly ignore the unique facts of each case, is contrary to the approach taken by a majority of other jurisdictions, and is unsupported by decisions from other jurisdictions denying recoupment in certain circumstances.  

Broad EIFS Exclusion Enforced

Many liability insurers writing coverage for construction contractors now include in their policies some form of exclusion for construction defect claims involving siding that is an exterior insulation finish system (“EIFS”). These exclusions often state that there is no coverage for property damage arising out of, or caused by, EIFS. But some insurers are now using a broader exclusion under which there is no coverage for exterior work if EIFS is used on any part of the building at issue. On February, 22, 2013, in First Mercury Ins. Co. v. Miller Roofing Enter. 2013 U.S. Dist. Lexis. 23728 (.pdf), the federal district court in Seattle enforced this broader exclusion to eliminate coverage for a claim against a roofer. The insured roofer argued that the EIFS exclusion should not apply because the alleged leak damage related to the insured’s roofing work and the insured performed no work involving the building’s EIFS siding. Judge Coughenour characterized this point as “irrelevant” because the exclusion applies so long as there is EIFS siding on any part of the building.


Washington Narrows Scope of Attorney-Client Privilege Available to Insurers

Last week, in a 5-4 decision authored by recently retired Justice Tom Chambers, the Washington Supreme Court greatly narrowed the scope of the attorney-client privilege available to first party insurers in bad faith litigation. The case – Cedell v. Farmers Ins. Co of Washington, 2013 Wash. LEXIS 149, February 21, 2013 (pdf.) – arose out of a residential fire loss in which Farmers allegedly failed to timely respond and then threatened to deny coverage unless the insured immediately accepted a settlement payment that was less than half of the total reported damages. The insured sued for bad faith and moved to compel after Farmers redacted large portions of its claim file on the basis of privilege. While Justice Chambers’ opinion reads as though he is merely reciting longstanding rules, the dissent points out that the Court in fact is imposing significant new restrictions on the privilege available to first party insurers (pdf). The opinion includes the following summary of the new framework in Washington:

In first party insurance claims by insured's claiming bad faith in the handling and processing of claims, other than UIM claims, there is a presumption of no attorney-client privilege. However, the insurer may assert an attorney-client privilege upon a showing in camera that the attorney was providing counsel to the insurer and not engaged in a quasi-fiduciary function. Upon such a showing, the insured may be entitled to pierce the attorney-client privilege. If the civil fraud exception is asserted, the court must engage in a two-step process. First, upon a showing that a reasonable person would have a reasonable belief that an act of bad faith has occurred, the trial court will perform an in camera review of the claimed privileged materials. Second, after in camera review and upon a finding there is a foundation to permit a claim of bad faith to proceed, the attorney-client privilege shall be deemed to be waived. However, in first party UIM claims, there is no presumption of waiver by the insurer of the attorney-client privilege but, consistent with Escalante, 49 Wn. App. at 394, and Barry, 98 Wn. App. at 206, that privilege may be pierced, among other ways, by the two step procedure described above for showing the bad faith civil fraud exception is applicable.

Mandatory Arbitration Struck Down in Washington

Some insurers include mandatory arbitration clauses in their policies. Today, in WSDOT v. James River Ins. Co. (.pdf), the Washington Supreme Court ruled that those provisions are unenforceable because they violate RCW 48.18.200(1)(b). The statute states that an insurance contract delivered or issued in Washington cannot deprive Washington courts of “the jurisdiction of action against the insurer.” In reaching its holding, the Court rejected James River’s argument that the legislature merely intended the statute to keep coverage disputes venued within the State of Washington. The Court also held that the Federal Arbitration Act does not preempt RCW 48.18.200 because the statute regulates the “business of insurance” such that there is “reverse preemption” under the McCarran-Ferguson Act

Construction Wrap Up Programs Unwrapped

For anyone looking for a quick primer on owner and contractor controlled insurance programs (OCIP/CCIP), check this new post on Jones Day’s insurance coverage blog --Insurance Policy Holder Advocate—by San Francisco partner Daven G. Lowhurst.  Daven plans two more posts to address pros and cons and key issues that can arise with these programs.

No Coverage for Text Message Claims Against Pizza Chain

Retail businesses continue to face class action lawsuits for various types of marketing campaigns (blast faxes, auto-calls, text messages, etc.). A Papa John’s pizza franchisee with more than 30 stores in Washington and Oregon is the target in one of these class actions as a result of text messages sent by a marketing firm that they had hired. The franchisee sought coverage from their general liability insurer, Oregon Mutual, despite a “Distribution of Material In Violation of Statutes” exclusion. That exclusion eliminates coverage for “any” bodily injury, property damage or personal and advertising injury “arising directly or indirectly out of any action of omission that violates or is alleged to violate” the TCPA or CAN-SPAM Act of 2003. The trial court ruled for the insured, finding that the exclusion did not apply because the insured had not committed the alleged statutory violations. But the Washington Court of Appeals granted an interlocutory appeal and reversed the decision yesterday. (Oregon Mut. Ins. Co. v. Rain City Pizza, LLC (.pdf)).

Writing for Division I, Judge Grosse concluded that Oregon Mutual’s policy unambiguously excludes coverage for the class action claims. Specifically, he rejected the insured’s argument that the exclusion is limited to violations committed by the insured such that there should be coverage for claims premised upon third party violations: “The policy language states ‘any’ act or omission and therefore does not limit the acts to those of a particular actor; rather, it applies to any acts that violate the statutes, which would include those committed by someone other than the insured.” The decision reflects a willingness to apply the word “any” to mean just what it says: any violations at all. Beyond using the word “any”, an insurer does not have to specify that the exclusion extends to third party conduct as well as the conduct of an insured.

Bad Faith/IFCA Claims Bifurcated

In Karpenski v. Am. Gen. Life. Co., LLC, 2012 U.S. Dist. LEXIS 183976 (W.D. Wash. Dec. 20, 2012) (.pdf), Judge Ricardo Martinez granted a life insurer's request to bifurcate its rescission claim from the insured's claims for bad faith and violation of Washington's Insurance Fair Conduct Act (IFCA). Judge Martinez reasoned that bifurcation was proper because the rescission "issues are not in any way intertwined with the issues presented by [the] claims of bad faith and IFCA violation" and if the insurer defendants "should prevail on their rescission counterclaim, that resolution will be dispositive of the entire case." Based upon this ruling, Judge Martinez stayed all bad faith discovery until resolution of the rescission issues.