News : Washington State's New Insurance Fair Conduct Act

WASHINGTON STATE'S NEW INSURANCE FAIR CONDUCT ACT


Washington State has enacted a new Insurance Fair Conduct Act that becomes effective on July 22, 2007. The Act, ESSB 5726, amends the Revised Codes of Washington “RCW” Section 48.30.10 (unfair practices - remedies and penalties) and significantly increases insurers' exposure to claims and damages by adding new statutory basis for policyholder claims.

Section 3(2) of the Act allows a claimant to obtain unlimited “actual damages,” together with attorneys’ fees and litigation costs. In addition, the court “may” increase the award of damages up to three times the actual damages.

Section 3(4) of the Act gives standing to “first party” insureds to assert claims under the Act for an “unreasonable” denial of a claim for coverage or benefits. (Section 3(1)) Washington case law has interpreted “unreasonable” to include “frivolous or unfounded.” Whether an insurer acted in bad faith - i.e., acted unreasonably, is a question of fact for a jury. Section 3(5) of the Act identifies certain conduct set forth in the Washington Administrative Code that is a violation of the Act. This includes:

Unfair Claims Settlement Practices:
(WAC 284-30-330)

(1) Misrepresenting pertinent facts of insurance policy provisions;

(2) Failing to act reasonably upon communications;

(3) Failing to implement reasonable standards for investigation of claims;

(4) Refusing to pay claims without a reasonable investigation;

(5) Failing to affirm or deny coverage of claims within a reasonable time;

(6) Not attempting in good faith to effectuate prompt and equitable settlement when liability has become reasonably clear;

(7) Compelling insureds to submit to litigation, arbitration, or appraisal to recover amounts after offering substantially less than the amounts recovered;

(8) Attempting to settle a claim for less than the amount one is led to believe is reasonable when analyzed in light of material made part of an application;

(9) Making claims payments without an accompanying statement setting forth the coverage under which the payments are made;

(10) Appealing from arbitration awards in favor of insureds for the purpose of compelling them to accept settlements less than the amount awarded in arbitration;

(11) Delaying payment of claims by requiring submission of duplicate information;

(12) Failing to settle under one portion of the insurance policy in order to influence settlements under other portions of the insurance policy;

(13) Failing to provide a reasonable explanation of the policy & applicable facts and law for denial of a claim or for the offer of a settlement;

(14) Unfairly discriminating against claimants because they are represented by a public adjuster;

(15) Failure to expeditiously honor drafts given in settlement of claims;

(16) Failure to implement reasonable standards for the payment of claims once the obligation to pay has been established;

(17) Delaying appraisals and use of appraisers from outside of the loss area;

(18) Failing to make a good faith effort to settle before exercising a right to an appraisal; and

(19) Negotiating or settling a claim directly with any claimant known to be represented by an attorney without the attorney's knowledge and consent.

Misrepresentation of Policy Provisions: (WAC 284-30-350)

(1) Failure to fully disclose all pertinent policy benefits;

(2) Concealment of benefits, coverages or other provisions pertinent to a claim;

(3) Denial of claim for failure to exhibit the property without demand and unfounded refusal by claimant to do so;

(4) Requirement for claimant to give written notice of loss within a specified time limit that will relieve the company of its obligations;

(5) No insurer will request a release extending beyond the subject matter of the claim;

(6) No insurer will issue drafts in partial settlement that contains language which releases the insurer or it’s insured from its total liability; and

(7) No insurer will make a payment of benefits without advising the payee that it may require reimbursement, when such is the case.

Failure to Acknowledge Pertinent Communications:
(WAC 284-30-360)

(1) Insurers have ten working days (fifteen for claims arising under group insurance) after notification of a claim to acknowledge unless payment is made within such period;

(2) Insurers have fifteen working days to respond to inquiries from the Office of the Insurance Commissioner;

(3) Insurers have ten working days (fifteen for claims arising under group insurance contracts) to respond to communications from a claimant that requires a response; and

(4) Insurers upon receiving notification of claim, will promptly provide claim documents and reasonable assistance.

Standards for Prompt Investigation:
(WAC 284-30-370)

Every insurer will complete investigation of a claim within thirty days after notification of claim, unless such investigation cannot reasonably be completed within such time.

Standards for Prompt, Fair and Equitable Settlements:
(WAC 284-30-380)

(1) Insurers must advise insured of acceptance or denial of claim within fifteen days of receipt of proofs of loss. All basis for exclusions or denials must be given in writing;

(2) Claims files must reflect reason for denial if payment is not made;

(3) Insurers must notify the insured within fifteen days if the insurer needs more time to determine whether a first party claim should be accepted or denied giving the reasons more time is needed. The insurer must within forty-five days from the date of the initial notification, and no later than every thirty days thereafter, send claimants a letter setting forth the reasons additional time is needed for investigation;

(4) Insurers cannot fail to settle first party claims on the basis that responsibility for payment should be assumed by others;

(5) Insurers cannot negotiate a settlement directly with a claimant who is not an attorney nor represented by an attorney;

(6) Insurer must notify claimant of expiring rights; and

(7) Insurers cannot make statements which indicate that the rights of a third party claimant may be impaired if a release is not completed within a given period of time unless the statement is given for the purpose of notifying the third party claimant of the provision of a statute of limitations.

Comments:

The new statue provides a very broad basis upon which a finding of bad faith claim handling may be found. Any dissatisfied “first party” insured can file a lawsuit against their insurer, and if they prevail on liability, the insured is entitled to actual damages, attorneys' fees, and punitive damages. It is widely expected that the new statue will increase the number of bad faith claims against the insurers, increase the average amount of damages recovered, and increase the expense of defending these cases. There is an ongoing attempt in Washington to place a referendum on the ballet to repeal the statute, however, it is doubtful that it will be successful.

What aspects of the statute can we expect to see the most litigation over? With respect to who is entitled to assert a claim under the statue, a “first party claimant” is not defined other than in Section (4) that identifies the claimant as a person covered under a policy for a contingent loss arising out of an occurrence. As such, we would expect to see attempts to trigger liability coverage by insureds and additional insureds under a variety of creative theories.

We can also expect to see the punitive damage aspect of the statue attacked as being unconstitutional and inconsistent with Washington State's tradition of not awarding punitive damages, except in limited circumstances. With respect to retroactivity, while the statute is not effective until July 22, 2007, we anticipate arguments that the statute is remedial in nature despite the presumption it is to apply prospectively and should be applied to existing claims.

Feel free to contact us if we can help you with a claim, or if you would like us to work with you on risk-management techniques to avoid or limit future claims.

Partner Robert M. Freedman Chairs the Firm's Commercial Litigation Practice Group and is licensed in California, Washington State, and the District of Columbia.



Related Attorney(s):
Robert M. Freedman

Related Practice Area(s):
Bad Faith and Coverage

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