The Washington Supreme Court recently held that a cause of action for bad faith claims handling is not dependant on whether the insurer breached its duty to defend, settle, or indemnify, either in the third-party context under the common law, or under the Washington Consumer Protection Act (“CPA”). St. Paul Fire and Marine Ins. Co. v. Onvia, Inc., No. 80359-5 (Wash., November 26, 2008) (en banc).
The plaintiff/insured was served with a class action lawsuit in February 2005, which it tendered to its liability insurer that same month. The insured purportedly resubmitted its tender letter in August 2005 and, thereafter, submitted to its insurer an amended complaint filed in September 2005. The insurer responded for the first time in November 2005, denying coverage for indemnity and defense, which denial it reaffirmed in March 2006. In April 2006, the insured, who had been defending itself with its own counsel in litigation and in settlement negotiations, entered into a settlement agreement whereby it stipulated to an entry of judgment and an assignment of its right against its insurer to the underlying plaintiffs in exchange for an agreement by the underlying plaintiffs that they would execute the judgment only against the insurer.
Thereafter, the insurer sought a declaratory judgment in the United States District Court for the Western District of Washington against the underlying plaintiffs, asserting that it had no duty to defend, settle, or indemnify its insured in the underlying action. The underlying plaintiffs responded with three counterclaims alleging (1) breach of the contractual duties to defend, indemnify, and settle; (2) bad faith breach of the duties to defend, indemnify, and settle; and (3) procedural bad faith and violation of the Consumer Protection Act related to the insurer’s handling of its insured’s tender. The district court granted summary judgment for the insurer on the first two counterclaims, and certified the third issue to the Washington Supreme Court.
The state supreme court first addressed whether an insured has a cause of action against its liability insurer for common law procedural bad faith even though a court has held that the insurer had no contractual duty to defend, settle, or indemnify the insured. The Court noted that, under Washington law, every insurer has a duty to act promptly, in both communication and investigation, in response to a claim or tender of defense. The Court therefore held that, even when the benefit of the insurance contract is not available to the insured, if the insurer handled the claim in bad faith, a cause of action based on that conduct remains available to the insured. The Court concluded, however, that no presumption of harm can arise in this context, and declined to recognize coverage by estoppel. The court held that an insured must prove actual harm, and its damages are limited to the amounts its has incurred as a result of the bad faith as well as general tort damages.
The Court also held that an insured may bring a Consumer Protection Act (CPA) claim for procedural bad faith in the absence of a duty to settle, indemnify, or defend. The Court further held that, to the extent an insured succeeds on its CPA claim, its remedy on that claim is limited to the statutory remedies available to any successful CPA claimant.