Defense Cost Recovery: The Federal Court Changes the Landscape in Washington

In 2013, the Washington State Supreme Court handed down the decision in National Surety Corp. v. Immunex that expanded defense cost exposure in Washington for liability insurers. Specifically, the Immunex court found that Washington liability insurers were not entitled to recovery of defense costs and fees which were incurred and paid for by a liability insurer even though there was no coverage for the loss. The court expressly found that even if the insurer reserved its rights as to reimbursement, there still is no right to recovery unless the liability policy expressly allowed for the recovery. National Surety Corp. v. Immunex, 176 Wn.2d 872, 888-889, 297 P.3d 688 (2013).

The Immunex decision caused significant concerns for liability insurers. It also provided a green light for insureds to tender claims where there was clearly no coverage with the expectation that the liability insurer would pay for the defense, (given Washington’s harsh penalties for denying a defense obligation), without any downside risk. Liability insurers, on the other hand, were forced to defend claims which were clearly not covered without any right to seek reimbursement even if it turned out that the claim was not covered. As a result, many insurers made it a practice to file declaratory judgment actions to have their defense obligations decided early on before the defense fees turned out to be more than the indemnity arguably owed under the policy. That option worked well, except of course when the insured files a motion for stay. If the stay is granted, the insurer could be stuck paying hundreds of thousands of dollars, if not more, in defense costs or be forced to try to settle out early and pay an uncovered claim in order to avoid the fees.

On April 17, 2019, the Honorable U.S. Federal Judge James Robart issued a decision in the case of Mass. Bay Ins. Co. v. Walflor Indus. There are several interesting components in regard to Judge Robart’s decision. First, the court addressed coverage under the Advertising Injury portion of a liability policy in a claim involving, in essence, a trademark/trade dress business dispute. These types of intellectual property claims have become more and more frequent in the highly competitive and sophisticated business environment of the Northwest. These claims are routinely tendered to liability insurers by insureds who look for coverage under the Coverage B section of the policy involving Advertising Injury. In states such as Washington, where the rules in regard to defense obligations are broad and the penalties are high, liability insurers have often picked up the defense of these claims.

Based upon the specific allegations and facts of the Massachusetts Bay case, the court found that there was no coverage under the policy in regard to defense or indemnity.

That is when the decision got very interesting. Massachusetts Bay Insurance Company had added an endorsement to their Washington insurance policies allowing for defense cost reimbursement. This Washington endorsement has been adopted by a number of insurers in a direct response to the Immunex decision. In Cross Motions for Summary Judgment, the policyholder requested that Judge Robart certify this specific question to the Washington Supreme Court. Judge Robart, who is never shy about making a tough decision, refused to certify the question. Rather, in a very clear and well written opinion, he addressed the issue of whether the policy language was void as against public policy or enforceable. Judge Robart found the language was not void and enforced the language as written. The court granted the insurer’s motion and held that the insurer was entitled to reimbursement of defense costs. A link to a copy of the decision is below.

Judge Robart’s decision was based primarily on the fact that the Immunex court clearly stated that the only reason it did not allow for reimbursement is because the policy in that case did not provide for such reimbursement. Since the policy in this Massachusetts Bay claim provided clear and unambiguous language allowing for reimbursement, the court enforced the policy language. What is unclear in the decision is whether the issue of ambiguity was ever clearly argued to the court. For example, it does not appear that there was any discussion in regard to whether costs and defense fees are in essence the same thing under Washington law in regard to this endorsement. What is clear, however, is that the court will allow insurers to potentially enforce their right to seek recovery of defense fees and costs. The decision also seems to suggest that there may have been a different result had the insurer not reserved its rights as to this issue.

From a practical standpoint, it is clear that insurers who do not have this Washington specific endorsement will in all likelihood consider adding this endorsement to their policies. Also, insurers who do have the language will need to be careful in reserving their rights as to this issue. They also should consider filing early declaratory judgment actions and have the courts review whether or not the insurer is entitled to reimbursement based upon their policy language and the Massachusetts Bay case. At this point, it is unclear whether the decision will be appealed to the Ninth Circuit. Regardless, this decision may have a chilling effect on insureds who are seeking coverage for defense where they know there is a potential that they may have to pay the money back.

Lether & Associates has addressed the Washington endorsement in a number of separate legal opinions provided to its clients. If you would like to discuss this endorsement with our office, please let us know.

Mass. Bay Ins. Co. v. Walflor Indus.

In 2013, the Washington State Supreme Court handed down the decision in National Surety Corp. v. Immunex that expanded defense cost exposure in Washington for liability insurers. Specifically, the Immunex court found that Washington liability insurers were not entitled to recovery of defense costs and fees which were incurred and paid for by a liability insurer even though there was no coverage for the loss. The court expressly found that even if the insurer reserved its rights as to reimbursement, there still is no right to recovery unless the liability policy expressly allowed for the recovery. National Surety Corp. v. Immunex, 176 Wn.2d 872, 888-889, 297 P.3d 688 (2013).

The Immunex decision caused significant concerns for liability insurers. It also provided a green light for insureds to tender claims where there was clearly no coverage with the expectation that the liability insurer would pay for the defense, (given Washington’s harsh penalties for denying a defense obligation), without any downside risk. Liability insurers, on the other hand, were forced to defend claims which were clearly not covered without any right to seek reimbursement even if it turned out that the claim was not covered. As a result, many insurers made it a practice to file declaratory judgment actions to have their defense obligations decided early on before the defense fees turned out to be more than the indemnity arguably owed under the policy. That option worked well, except of course when the insured files a motion for stay. If the stay is granted, the insurer could be stuck paying hundreds of thousands of dollars, if not more, in defense costs or be forced to try to settle out early and pay an uncovered claim in order to avoid the fees.

On April 17, 2019, the Honorable U.S. Federal Judge James Robart issued a decision in the case of Mass. Bay Ins. Co. v. Walflor Indus. There are several interesting components in regard to Judge Robart’s decision. First, the court addressed coverage under the Advertising Injury portion of a liability policy in a claim involving, in essence, a trademark/trade dress business dispute. These types of intellectual property claims have become more and more frequent in the highly competitive and sophisticated business environment of the Northwest. These claims are routinely tendered to liability insurers by insureds who look for coverage under the Coverage B section of the policy involving Advertising Injury. In states such as Washington, where the rules in regard to defense obligations are broad and the penalties are high, liability insurers have often picked up the defense of these claims.

Based upon the specific allegations and facts of the Massachusetts Bay case, the court found that there was no coverage under the policy in regard to defense or indemnity.

That is when the decision got very interesting. Massachusetts Bay Insurance Company had added an endorsement to their Washington insurance policies allowing for defense cost reimbursement. This Washington endorsement has been adopted by a number of insurers in a direct response to the Immunex decision. In Cross Motions for Summary Judgment, the policyholder requested that Judge Robart certify this specific question to the Washington Supreme Court. Judge Robart, who is never shy about making a tough decision, refused to certify the question. Rather, in a very clear and well written opinion, he addressed the issue of whether the policy language was void as against public policy or enforceable. Judge Robart found the language was not void and enforced the language as written. The court granted the insurer’s motion and held that the insurer was entitled to reimbursement of defense costs. A link to a copy of the decision is below.

Judge Robart’s decision was based primarily on the fact that the Immunex court clearly stated that the only reason it did not allow for reimbursement is because the policy in that case did not provide for such reimbursement. Since the policy in this Massachusetts Bay claim provided clear and unambiguous language allowing for reimbursement, the court enforced the policy language. What is unclear in the decision is whether the issue of ambiguity was ever clearly argued to the court. For example, it does not appear that there was any discussion in regard to whether costs and defense fees are in essence the same thing under Washington law in regard to this endorsement. What is clear, however, is that the court will allow insurers to potentially enforce their right to seek recovery of defense fees and costs. The decision also seems to suggest that there may have been a different result had the insurer not reserved its rights as to this issue.

From a practical standpoint, it is clear that insurers who do not have this Washington specific endorsement will in all likelihood consider adding this endorsement to their policies. Also, insurers who do have the language will need to be careful in reserving their rights as to this issue. They also should consider filing early declaratory judgment actions and have the courts review whether or not the insurer is entitled to reimbursement based upon their policy language and the Massachusetts Bay case. At this point, it is unclear whether the decision will be appealed to the Ninth Circuit. Regardless, this decision may have a chilling effect on insureds who are seeking coverage for defense where they know there is a potential that they may have to pay the money back.

Lether & Associates has addressed the Washington endorsement in a number of separate legal opinions provided to its clients. If you would like to discuss this endorsement with our office, please let us know.

Mass. Bay Ins. Co. v. Walflor Indus.

In 2013, the Washington State Supreme Court handed down the decision in National Surety Corp. v. Immunex that expanded defense cost exposure in Washington for liability insurers. Specifically, the Immunex court found that Washington liability insurers were not entitled to recovery of defense costs and fees which were incurred and paid for by a liability insurer even though there was no coverage for the loss. The court expressly found that even if the insurer reserved its rights as to reimbursement, there still is no right to recovery unless the liability policy expressly allowed for the recovery. National Surety Corp. v. Immunex, 176 Wn.2d 872, 888-889, 297 P.3d 688 (2013).

The Immunex decision caused significant concerns for liability insurers. It also provided a green light for insureds to tender claims where there was clearly no coverage with the expectation that the liability insurer would pay for the defense, (given Washington’s harsh penalties for denying a defense obligation), without any downside risk. Liability insurers, on the other hand, were forced to defend claims which were clearly not covered without any right to seek reimbursement even if it turned out that the claim was not covered. As a result, many insurers made it a practice to file declaratory judgment actions to have their defense obligations decided early on before the defense fees turned out to be more than the indemnity arguably owed under the policy. That option worked well, except of course when the insured files a motion for stay. If the stay is granted, the insurer could be stuck paying hundreds of thousands of dollars, if not more, in defense costs or be forced to try to settle out early and pay an uncovered claim in order to avoid the fees.

On April 17, 2019, the Honorable U.S. Federal Judge James Robart issued a decision in the case of Mass. Bay Ins. Co. v. Walflor Indus. There are several interesting components in regard to Judge Robart’s decision. First, the court addressed coverage under the Advertising Injury portion of a liability policy in a claim involving, in essence, a trademark/trade dress business dispute. These types of intellectual property claims have become more and more frequent in the highly competitive and sophisticated business environment of the Northwest. These claims are routinely tendered to liability insurers by insureds who look for coverage under the Coverage B section of the policy involving Advertising Injury. In states such as Washington, where the rules in regard to defense obligations are broad and the penalties are high, liability insurers have often picked up the defense of these claims.

Based upon the specific allegations and facts of the Massachusetts Bay case, the court found that there was no coverage under the policy in regard to defense or indemnity.

That is when the decision got very interesting. Massachusetts Bay Insurance Company had added an endorsement to their Washington insurance policies allowing for defense cost reimbursement. This Washington endorsement has been adopted by a number of insurers in a direct response to the Immunex decision. In Cross Motions for Summary Judgment, the policyholder requested that Judge Robart certify this specific question to the Washington Supreme Court. Judge Robart, who is never shy about making a tough decision, refused to certify the question. Rather, in a very clear and well written opinion, he addressed the issue of whether the policy language was void as against public policy or enforceable. Judge Robart found the language was not void and enforced the language as written. The court granted the insurer’s motion and held that the insurer was entitled to reimbursement of defense costs. A link to a copy of the decision is below.

Judge Robart’s decision was based primarily on the fact that the Immunex court clearly stated that the only reason it did not allow for reimbursement is because the policy in that case did not provide for such reimbursement. Since the policy in this Massachusetts Bay claim provided clear and unambiguous language allowing for reimbursement, the court enforced the policy language. What is unclear in the decision is whether the issue of ambiguity was ever clearly argued to the court. For example, it does not appear that there was any discussion in regard to whether costs and defense fees are in essence the same thing under Washington law in regard to this endorsement. What is clear, however, is that the court will allow insurers to potentially enforce their right to seek recovery of defense fees and costs. The decision also seems to suggest that there may have been a different result had the insurer not reserved its rights as to this issue.

From a practical standpoint, it is clear that insurers who do not have this Washington specific endorsement will in all likelihood consider adding this endorsement to their policies. Also, insurers who do have the language will need to be careful in reserving their rights as to this issue. They also should consider filing early declaratory judgment actions and have the courts review whether or not the insurer is entitled to reimbursement based upon their policy language and the Massachusetts Bay case. At this point, it is unclear whether the decision will be appealed to the Ninth Circuit. Regardless, this decision may have a chilling effect on insureds who are seeking coverage for defense where they know there is a potential that they may have to pay the money back.

Lether & Associates has addressed the Washington endorsement in a number of separate legal opinions provided to its clients. If you would like to discuss this endorsement with our office, please let us know.

Mass. Bay Ins. Co. v. Walflor Indus.

Washington Supreme Court Hears Oral Argument in Case That Allowed Insureds to Name Adjusters as Defendants in Bad Faith Actions

On February 26, 2019, the Washington Supreme Court heard oral arguments in Keodalah v. Allstate Ins. Co. and Tracey Smith.  In this case, the Court of Appeals overturned the trial court’s dismissal of bad faith and Consumer Protection Act claims asserted directly against Tracey Smith, an adjuster for Allstate.

A link for the video recording of the oral argument is provided below:

https://www.tvw.org/watch/?eventID=2019021551

A link for the briefing filed with the Supreme Court is provided below:

https://www.courts.wa.gov/appellate_trial_courts/coaBriefs/index.cfm?fa=coabriefs.briefsByCase&courtId=A08

The issue to be addressed by the Supreme Court is whether the Keodalahs may plead a claim for bad faith and Consumer Protection Act violations directly against the Allstate adjuster, Tracey Smith. Since the Court of Appeals’ decision in Keodalah was published in March 2018, it has become common for insureds to name both the insurance company and the adjuster in lawsuits alleging bad faith claims handling.  Over the last 11 months, the ability to name the insured in a bad faith lawsuit has given rise to a multitude of new issues that must be addressed in these suits. These issues include questions about insurance counsel representing the adjuster as well as the ability to avoid federal court diversity jurisdiction by naming a local adjuster as a defendant in a lawsuit.

At the oral argument hearing, Allstate and Ms. Smith asserted that the only potentially available claim against an adjuster would be based on the general good faith statute, RCW 48.01.030, and would require the Court to hold that this statute provided for an implied right of action under Washington’s test for implying such an action.  They explained that an adjuster cannot be subject to a common law bad faith claim because there was no quasi-fiduciary relationship between an adjuster and insured. They then established that the good faith statute does not imply a right of action against an adjuster under the test.

In response, the insureds asserted that their claim was actually based on common law bad faith and the good faith statute provided the duty which applies to the adjuster for this claim.  They then stated that recognizing a bad faith claim against an adjuster was necessary to prevent the insurance company from avoiding bad faith liability by asserting that its adjuster’s offending conduct was outside the scope of the adjuster’s authority and employment duties with the insurance company.

We expect the Supreme Court to publish its decision in this case within the next few months.  The Supreme Court’s decision and its reasoning for reaching that decision will very likely have a substantial impact on how bad faith lawsuits are litigated for years to come.

If you have any questions about how the Keodalah case impacts the bad faith litigation landscape, please give us a call.

A Tale of Two Cases. The Best of Times and the Worst of Times

Within roughly a two-week period over this past holiday season, the Federal District Courts for the Western District of Washington issued two dramatically different orders in very similar coverage disputes. In Northwest Pipe Company v. Travelers Property Casualty Company of America and The Phoenix Insurance Company (3:17-cv-05098-BHS), the Honorable Benjamin Settle of the Tacoma District granted Travelers’ summary judgment motion dismissing Northwest Pipe’s bad faith and Consumer Protection Act claims. This decision came 14 days after the Honorable John Coughenour of the Seattle District issued a summary judgment in favor of Osborne Construction Company against Zurich American Insurance Company. In the Osborne Construction Company v. Zurich American Insurance Company matter the court found Zurich had acted in bad faith (2:18-cv-00349-JCC).

The two cases presented very similar issues. A review of the facts of the cases, however, clearly establishes the right way to handle construction liability claims in Washington and the wrong way to handle those claims. In Northwest Pipe Company v. Travelers Property Casualty Company of America and The Phoenix Insurance Company, Travelers correctly identified a tender from the named insured, agreed to assign counsel, and issued a timely and thorough reservation of rights letter. Northwest Pipe argued that Travelers was obligated to pay for the insured’s personal counsel who had allegedly assisted in the defense of Northwest Pipe. Northwest Pipe also argued that the reservation of rights letter issued by Travelers was untimely. Taking the position that Travelers had denied the claim and had failed to investigate coverage in a reasonable manner, Northwest Pipe argued that Travelers was precluded from raising coverage defenses based upon the doctrine of coverage by estoppel. Judge Settle rejected this argument and denied Northwest Pipe’s motion and granted Travelers’ motion for summary judgment dismissing all extra-contractual claims.

The Court found that Travelers was not obligated to respond to the alleged claim for the insured’s personal counsel’s fees and that Travelers’ position in regard to that claim was reasonable. The Court also noted that the remedy of coverage by estoppel is a drastic remedy that would not have been applicable even if the court had found a question of fact in regard to the bad faith claim. In regard to the coverage by estoppel issue, the Court’s decision was consistent with the decision in Ledcor Indus. (USA), Inc. v. Mut. of Enumclaw Ins. Co., 150 Wn. App. 1, 10, 206 P.3d 1255, 1261 (2009), wherein the Court found that coverage by estoppel does not apply in all cases and that an insured still must establish actual damage for a bad faith claim.

In Osborne Construction Company v. Zurich American Insurance Company, Zurich denied the defense of an AI tender. Zurich took the position that the tender was unclear and that Osborne had failed to establish that it had entered into a contract with the named insured requiring the named insured to procure insurance. Judge Coughenour found that the tender was sufficient to place Zurich on notice and that Zurich failed to investigate the AI tender appropriately. As a result, Judge Coughenour found that Zurich had not only acted in bad faith but also found that coverage by estoppel applied as a matter of law.

The disparity between these two cases presents an excellent case study of how to properly investigate liability construction cases in Washington, particularly when it comes to a tender and the prompt issuance of a correct reservation of rights letter. In a similar manner, the Zurich decision shows the extreme dangers of an inappropriate coverage position or improper investigation.

The Federal Courts remain an excellent place for insurers to litigate coverage issues. However, as these cases show, the Courts will not tolerate improper claims handling. However, the Courts will reward those insurers who follow the rules.

Lether & Associates proudly represented Travelers in theNorthwest Pipe Company v. Travelers Property Casualty Company of America and The Phoenix Insurance Company matter. If you would like to discuss these cases or any issue involving Washington law, feel free to contact our offices.

Oregon Again Limits Defense Obligations on Additional Insured Claims

The Oregon Court of Appeals recently issued an opinion which clarifies an insurer’s defense obligations to an additional insured (“AI”) under an AI endorsement for “ongoing operations”. See Security National Ins. Co. v. Sunset Presbyterian Church, 289 Ore. App. 193 (2017). Specifically, the Sunset Presbyterian case addressed two fundamental issues: (1) what allegations are sufficient to trigger an insurer’s duty to defend an AI where the AI endorsement only provides coverage for liability arising out of the named insured’s “ongoing operations”; and (2) whether an insurer must defend against all claims asserted against an AI, or whether it may only defend those claims that arise out of the named insured’s liability.

In Sunset Presbyterian, a property owner (“Sunset Presbyterian”) filed suit against a general contractor (“Andersen”) for alleged construction defects in building a church. Andersen then filed a third party complaint against its various subcontractors, including “B&B” which had provided masonry work on the project. As part of its subcontract with Andersen, B&B had agreed to add Andersen as an AI on its liability policy for any liability arising out of B&B’s “ongoing operations” that it performed for Andersen. Notably, Sunset Presbyterian’s complaint against Andersen was silent as to whether or not the alleged damage occurred while B&B was still performing its ongoing operations at the job site.

After being sued, Andersen tendered a claim to B&B’s liability insurer, Security National Insurance Company (“SNIC”), and sought AI coverage. SNIC denied defense coverage to Andersen, in part, on the grounds that Sunset Presbyterian’s complaint did not allege that Andersen’s liability arose out of B&B’s “ongoing operations”. Under SNIC’s interpretation of its AI endorsement, SNIC argued that it would only owe a defense obligation to Andersen for property damage that arose out of B&B’s work while B&B was still performing work on the project. SNIC further argued that because Sunset Presbyterian’s complaint failed to allege that the property damage occurred while B&B was working on the project, SNIC was not obligated to defend Andersen.

The Oregon appellate court rejected this argument. In accordance with established Oregon jurisprudence, the court reasoned that an insurer’s duty to defend is much broader than its duty to indemnify, and is triggered so long as the complaint alleges the possibility that an AI could be liable for the alleged damage. As it pertains to an AI endorsement that is limited to “ongoing operations”, the court ruled that a “duty to defend exists if the complaint alleges the possibility that damage occurred during ‘ongoing operations’.” Thus, a complaint does not need to expressly allege that damage occurred while the named insured was working on the project.  Rather, defense coverage is triggered so long as the complaint can reasonably be read to allege that damage occurred while the named insured was working on the project as part of its “ongoing operations.”

Based on this reasoning, the court ruled that SNIC had improperly denied defense coverage to Andersen. The court found that although the “underlying complaint does not allege when damage occurred in relation to when B&B was on the job, … for purposes of the duty to defend, it suffices that the complaint alleges damages that may have occurred” while B&B was performing work at the job site.

The court also confronted whether SNIC was obligated to defend Andersen against all claims asserted by Sunset Presbyterian in the underlying lawsuit, or just those claims that arose from B&B’s acts and omissions.  In evaluating this issue, the court analyzed Oregon’s anti-indemnity statute, ORS 30.140, and prior Oregon case law which found that the anti-indemnity statute also applies to insurance policies. See Walsh Construction Co. v. Mutual of Enumclaw, 338 Or 1, 104 P3d 1146 (2005). Pursuant to Oregon’s anti-indemnity statute, although an indemnitor (such as a subcontractor) may indemnify an indemnitee (such as a general contractor) for the indemnitor’s liability, the statute prohibits an indemnitor from indemnifying an indemnitee for the indemnitee’s misconduct.

Although Oregon’s anti-indemnity statute had previously been applied in the insurance context pursuant to the Walsh Construction case, the Sunset Presbyterian case extended this principle to the context of an insurer’s defense obligations. Specifically, the Oregon appellate court concluded “that ORS 30.140 circumscribes the insurer’s duty to defend just as it circumscribes the indemnitor’s duty to defend. Accordingly, SNIC’s duty to defend under its policy does not extend to defend all claims; rather, SNIC’s duty to defend corresponds to Andersen’s potential liability that arises out of the fault of B&B.” Based on this reasoning, the court ruled that an insurer is not obligated to defend an AI against all claims, but is only obligated to defend an AI against those claims which arise from the named insured’s acts and omissions.

The Sunset Presbyterian case presents an interesting development as to how the Oregon courts approach an insurer’s duties and defense obligations to an additional insured. To the extent you have any questions regarding this case law, or any other insurance-related legal issue, please feel free to contact the attorneys at Lether & Associates, PLLC.

Oregon Supreme Court Unanimously Rules Against Application of Oregon’s Vulnerable Person Statute to First Party Insurance

There have been repeated unsuccessful legislative attempts over the last several years to impose statutory bad faith on first party insurance claims in Oregon. In an unanimous decision published on January 19, 2018, the Oregon Supreme Court declined to take the opportunity to circumvent Oregon’s first party insurance law by imposing bad faith liability through the application of Oregon’s vulnerable person statute. Bates v. Bankers Life & Cas. Co., 849 F.3d 846 (9th Cir 2017).

The Bates case was reviewed by the Supreme Court due to receipt of a certified question from the United States Court of Appeals for the Ninth Circuit. The Bates couple, who are elderly, alleged that Bankers Life acted in bad faith by denying and delaying payment of benefits owed under their long-term care insurance policy. They asserted that Bankers Life’s bad faith actions constituted abuse of a vulnerable person under ORS 124.110(1)(b) because they qualified as wrongful withholding of money or property of a vulnerable person.

Bankers Life argued that ORS 124.110(1)(b) does not apply to its insurer-insured relationship with Bates. Bankers Life explained that it does not hold in trust or control any “money or property” owned by Bates. Rather, Bates purchased insurance from Bankers Life in exchange for the payment of premiums. Bankers Life further asserted that its contractual obligation to pay benefits under the policy did not constitute money or property of Bates.

The Court agreed with Bankers Life and held that the Elder Abuse statute only applies when a vulnerable person seeks the return of the same money or property that he or she transferred to another person. The court explained that Bates failed to show that the money they sought was the same money Bankers Life had acquired from them in the form of premium payments.

This ruling is a significant decision against policyholder attorneys who seek to utilize creative theories in an attempt to circumvent Oregon’s first party insurance law. However, we assume policyholder attorneys will continue with their efforts to persuade the Oregon legislature to pass a first party bad faith statute as many of its neighboring states have already done (e.g. Washington’s Insurance Fair Conduct Act).

If you have any questions about this case or how it may affect any of your pending or future claims, do not hesitate to contact our office.

Allstate Makes Bad Case Law In Washington

There is an age-old saying that lawyers – especially appellate lawyers – commonly use. That phrase is “bad facts make bad law”.

This statement was proven accurate once again in the decision of Keodalah v. Allstate Ins. Co., et al., Court of Appeals of the State Washington, Case No. 75731-8-I. In the Keodalah decision, Division I of the Washington State Court of Appeals created a whole new legal theory of bad faith directly against insurance adjusters as opposed to simply insurers. A copy of the decision is attached in the below link.

In Keodalah, the insured asserted a UIM claim following a motor vehicle accident.  The accident involved the insured and a motorcycle.  According to the Seattle Police Department (“SPD”), the motorcyclist was traveling around 70 mph in a 30 mph zone.  The SPD further determined that the insured was not using his cell phone at the time of the accident.  Allstate also hired an accident reconstruction expert, who opined that the motorcyclist’s excessive speed caused the accident.

Allstate took the position that the insured was 70% liable for the accident despite the above evidence.  The insured filed suit.  Ultimately, the case went to trial.  A jury determined the insured had no fault for the accident.  The insured was awarded damages for injuries, lost wages, and medical expenses.

The insured then filed a second lawsuit against Allstate and the adjuster directly alleging extra-contractual claims. Allstate and the adjuster moved to dismiss the complaint under CR 12(b)(6).  The trial court granted the motion and dismissed the insured’s claims against the adjuster.

On discretionary review, the Court of Appeals reinstated the bad faith and Consumer Protection Act claims against the adjuster.  With respect to the bad faith claim, the Court reasoned that Washington law imposes a duty of good faith on “all persons” involved in insurance, including the insurer and its representatives. RCW 48.01.030. A “Person” is defined as “any individual, company, insurer, association, organization, reciprocal or interinsurance exchange, partnership, business trust, or corporation.” RCW 48.01.070. The Court determined that, under the plain language of the statute, the adjuster had an individual duty to act in good faith and could be sued for breaching this duty.

The Court also maintained the CPA claim against the adjuster, finding that a consumer or business relationship was not necessary to support a CPA claim. Without any significant analysis, the Court held that “individual insurance adjusters can be liable for a violation of the CPA.”

The Keodalah decision is a dramatic departure from the law in most jurisdictions. Previously, most Washington State trial court decisions have refused to find adjusters directly liable for causes of action involving bad faith, particularly when adjusters are direct employees of the insurer. Although third-party administrators and independent adjusters are often sued for bad faith, this decision provides for the first time a bad faith claim against individual employees of an insurer.

The impact of this latest decision will be significant on the insurance industry and will raise even further questions. For example, will insurers need to appoint separate counsel for their adjusters when their adjusters are named in litigation? How will this decision impact adjusters’ relationships with their employers? What internal HR decisions will evolve from the decision?  Can this analysis be a basis for counsel to be sued? Does this decision mean insureds are liable for their own bad faith conduct?

From a practical standpoint the biggest impact may be on out-of-state insurers who attempt to remove cases to Federal Court.  Insureds could destroy diversity jurisdiction by naming an in-state adjuster.  This would confine insurers to Washington State Court when litigating coverage issues. As a result, non-Washington insurers may want to consider filing a declaratory judgment action first when there is a possibility that an in-state adjuster may be named to defeat diversity.  This approach may preserve an insurer’s ability to litigate in Federal Court and avoid the Washington State trial courts.

As always, it is crucial to look at the facts of any case and the impact an adverse decision may have on the entire industry before you take a case to the Washington Court of Appeals.

If you would like to discuss the impact of this decision, please feel free to contact us.

Keodalah v. Allstate