Washington State just became even more hostile to insurers. Recently, the state’s highest court issued two decisions that will make claims-handling yet more difficult in the Evergreen State and that are in opposition to the majority view in U.S. jurisdictions.
First, in Staples v. Allstate Ins. Co., 295 P.3d 201 (Wash. 2013) (copy available here), the Supreme Court of Washington held that if an examination under oath is not “material” to a first-party insurer’s coverage investigation, the insurer cannot demand it. In other words, while most jurisdictions do not require a showing of prejudice for an insurer to deny coverage to an insured that refuses to submit to an examination under oath, Washington now does require such a showing.
In Staples, the insured gave recorded statements, but not under oath. The insured’s answers were inconsistent, and the insured refused to produce various documents in the course of the insurer’s investigation. He then also refused to submit to the examination under oath. He eventually sued for breach of contract and bad faith. Despite these facts, the Supreme Court held in an en banc decision (over one dissenter) that it was an issue of fact whether the insured’s refusal to submit to an examination under oath prejudiced the insurer. The court overruled the grant of summary judgment to the insurer.
In Cedell v. Farmers Ins. Co. of Wash., 295 P.3d 239 (Wash. 2013) (copy available here), in a 5-4 decision, the court held that the attorney-client and attorney work product privileges are presumed not to apply against a claim of bad faith. The insurer can only rebut that presumption, through an application for protective order and an in camera review process, with regard to advice to the insurer on coverage and strategy. Any communications or work product regarding investigation, evaluation, or processing of the claim cannot be withheld.The court based this holding on Washington’s principle that an insurer stands in a “quasi-fiduciary” role toward its insured.
The court concluded that the activities of claim investigation and evaluation are activities taken in that “quasi-fiduciary” role and, therefore, there can be no privilege as against the insured. If the attorney is retained to advise the insurer on “its own liability” by advising on coverage and strategy, on the other hand, these are not deemed “quasi-fiduciary” tasks and are, therefore, protected by the applicable privileges. The distinguishing factors for the court were that coverage counsel talked and negotiated directly with the insured.
Insurers will now have to grapple with several difficult problems when handling claims in Washington: how to distinguish between advice on “coverage and strategy” on the one hand, and “investigation and evaluation” on the other? The already difficult concept of acting as a “quasi-fiduciary” to an insured in the claims process – when the insured’s and the insurer’s financial interests are necessarily diametrically opposed – becomes even more inscrutable.