Northwest Insurance Law Blog : Seattle Insurance Lawyer & Attorney : Williams Kastner Law Firm : Tacoma, Washington, Portland

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Oregon House Bill 2791, currently before the state legislature, would create a private right of action against an insurer that engages in “unfair claim settlement practices,” as defined by ORS § 746.230. Among the practices penalized are an insurer’s misrepresentation of facts to the insured, its refusal to pay claims without conducting a reasonable investigation, and its bad faith denial of a claim.

Under current Oregon law, a plaintiff-insured who proves that his insurer violated the terms of the insurance policy is generally limited to a recovery of “actual damages” based simply on a breach of contract theory. Meanwhile, if HB 2791 passes, plaintiffs who establish that the insurer engaged in an “unfair claim settlement practice” would be entitled to reasonable attorneys fees and treble damages.

In effect, the statute, aimed at punishing and deterring “unfair” conduct, would prescribe a set formula for calculating punitive damages against offending insurers: two times actual damages (one third of the treble damages being actual damages and two thirds being punitive in nature).

An exception to the current “actual damages” limitation, apparently approved of by the Oregon Supreme Court in Goddard v. Farmers Ins. Co., 344 Or 232, 263-264 (2008), is that punitive damages are available to a plaintiff-insured who establishes that an insurer negligently failed to settle a third-party claim within policy limits. Presumably, the bill would not have as significant an impact on such cases, since punitive damages are already available.

The powerful new remedies that HB 2791 would provide has sparked controversy. The insurance industry charges that the bill would drive up the cost of insurance premiums for consumers by hindering insurers’ ability to investigate fraud, encouraging the filing of frivolous lawsuits, and driving up the cost of defending against and settling insurance claims. Meanwhile, proponents of the bill counter that passage of the bill is necessary to protect consumers by deterring insurers from engaging in unfair practices.
 

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Washington's recent adoption of a treble damages statute -- The Insurance Fair Conduct Act, RCW ch. 48.30 ('IFCA") -- has changed the landscape for insurers and insureds going forward. Insurers now face the possibility of a punitive damages claim whenever they do not accept coverage for a claim.

A number of insureds have also sought punitive damages for claims denials made prior to passage of IFCA on December 6, 2007. Federal district courts in Washington have already concluded several times that IFCA does not apply retroactively -- Malbco Holdings v. Amco Insurance Co., 546 F.Supp.2d 1130 (E.D. Wash. 2008) and Scanlon v. Life Insurance Company of North America, Case No. C08-0256-JCC (W.D. Wash. Dec. 12, 2008); HSS Enterprises, LLC v. AMCO Insurance Co., 2008 WL 312695 (W.D. Wash. Feb. 1 2008); Aecon Buildings, Inc. v. Zurich North America, 2008 WL 895978 (W.D. Wash. March 28, 2008); and Pacific Coast Container, Inc. v. Royal Surplus Lines Insurance Co., 2008 WL 2705588 (W.D. Wash. July 8, 2008).

In Rinehart v. Life Insurance Company of North America, the insured plaintiff attempted to sidestep the non-retroactive application of IFCA by focusing upon the insurer's conduct after adoption of IFCA. The case involved long term disability benefits; the insurer terminated benefits in October 2007 prior to IFCA, but denied the insured's appeal of that decision 11 days after IFCA's passage. The insured argued that the insurer's denial of the appeal constituted an independent unreasonable act in violation of IFCA. On March 2, 2009, ruling on the insured's motion for a jury trial on the issue of punitive damages, Judge Ronald Leighton rejected the insured's argument and dismissed the punitive damages claim. Relying upon the Malbco and Scanlon decisions, the court reasoned that the precipitating event behind the claim was the decision to terminate benefits made prior to IFCA.