Bad Faith - Washington Supreme Court Holds That An Insurer Can Be Held Liable For Bad Faith Even In The Absence Of A Duty To Defend, Indemnify Or Settle
Last week, in St. Paul Fire and Marine Ins. Co. v. Onvia, Inc., No. 80359-5 (Nov. 26, 2008), the Washington Supreme Court, in answering certified questions from the U.S. District Court for the Western District of Washington,
held that an insured has a cause of action against its liability insurer for bad faith claims handling even though the insurer had no duty to defend, indemnify or settle. The court further held that for the insured to recover, it
must prove actual harm and damages.
Onvia arose from a complaint filed on February 3, 2005, against Onvia, the insured, alleging that it had engaged in unlawful “fax blasting.” On February 24, 2005, Onvia's insurance broker allegedly tendered
the complaint to St. Paul, Onvia’s liability insurer, via fax. Although St. Paul said it did not receive the tender, there was evidence that it was successfully faxed. St. Paul did not respond to the February tender, and the
February 24 letter was resubmitted on August 5, 2005. St. Paul subsequently denied coverage on November 24, 2005. Onvia defended itself in the underlying action, and in April 2006, stipulated to a judgment against it and an assignment
of its rights against St. Paul to RMS (the plaintiff) in exchange for its agreement to execute only against St. Paul.
On July 26, 2006, St. Paul filed suit in federal district court against RMS asserting that it had no duty to defend, settle or indemnify Onvia in the underlying case. RMS counterclaimed for: (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) common law procedural bad faith and violation of the Washington Consumer Protection Act (“CPA”) related to St.
Paul’s handling of Onvia’s tender. The parties cross-moved for partial summary judgment, and the court ruled in St. Paul’s favor holding that St. Paul had no duty to defend, indemnify or settle and that St. Paul
did not commit bad faith when it refused to defend Onvia. On RMS’s remaining claims of common law procedural bad faith and violation of the CPA, the court certified two questions to the Washington Supreme Court. First, under
Washington law, does an insured have a cause of action against its liability insurer for common law procedural bad faith for violation of the CPA, even though a court has held that the insurer had no contractual duty to defend, settle,
or indemnify the insured? Second, if the answer to the first question is yes, is the insured required to prove that the insurer’s conduct caused actual harm, or is there a presumption of harm, and how should damages be measured?
The Washington Supreme Court answered yes to the first question based on its ruling in Coventry Assocs. v. Am. States Ins. Co., 961 P.2d. 933 (Wash. 1998), which involved a first-party policy and held that the insurer’s
duty of good faith is separate from its duty to indemnify, and that a bad faith action for mishandling a claim could be asserted even in the absence of coverage. Relying upon Coventry, the court held that “although
here the benefit of the insurance contract (i.e., defense, settlement, and payment) is not available to the insured, if St. Paul handled the claim in bad faith, a cause of action based on this conduct remains available to
the insured.” On the second question, the court noted that because the focus was on St. Paul’s lack of attention immediately following the tender and because a reservation of rights or failure to defend was not at issue,
Coventry controlled, and RMS was required to show actual harm and could only recover for proven damages. Lastly, the court held that the CPA recognizes a claim for violation of claims-handling regulations that does not depend
on a finding of bad faith or the existence of a duty to settle, indemnify or defend.