Washington state can be a difficult jurisdiction for insurers. Insurers' duties of care are sometimes interpreted or applied quite broadly, and if an insurer breaches those duties, it can be subjected to tort damages, coverage by estoppels, treble damages, and an award of reasonable attorneys' fees.
To help insurers avoid or mitigate their extra-contractual exposure, Sedgwick LLP's Bob Meyers prepared Washington Bad Faith Law At A Glance, arguably the seminal and most comprehensive resource on Washington insurance bad faith law. In his paper, Mr. Meyers cites notable Washington authorities relating to common law bad faith, the Consumer Protection Act, and the Insurance Fair Conduct Act. For insurers' ease of reference, he also includes excerpts from notable Washington insurance statues and regulations.
In the Third Edition, Mr. Meyers addresses several recent developments about which any insurer with exposure in Washington should be aware, including  the Washington Supreme Court's conclusion that a regulatory violation is not independently actionable under the Insurance Fair Conduct Act,  the Ninth Circuit Court of Appeals' conclusion that an insured under a liability insurance policy is not a "first party claimant" with a right of action under the Insurance Fair Conduct Act,  a Washington Court of Appeals' reaffirmation that an insurer generally has the right to select defense counsel,  a federal judge's reaffirmation that estoppels cannot be used to create insurance coverage that never existed, and  a Washington Court of Appeals' conclusion that an insured may assert a bad faith claim against an insurer's claim adjuster. He also discusses recently filed Washington cases that address an insured's burden of proving bad faith, the presumption of harm, coverage by estoppels, privilege and work product issues, and damage issues.
§ 1. Common Law Bad Faith
§ 1.1. Duty — General
In all insurance matters, all persons owe a duty of good faith, to abstain from deception, to practice honesty and equity, and to preserve inviolate the integrity of insurance. RCW 48.01.030; Appendix A.
§ 1.1.a. Duty and Breach — Insurers
A third-party claimant does not have a direct right of action against an insurer for an alleged breach of the duty of good faith. See, e.g., Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 391, 715 P.2d 1133, 1139 (1986). Likewise, at least one Washington judge has concluded that an insured's spouse and marital community do not have a direct right of action for insurance bad faith. See, e.g., Staheli v. Chicago Insurance Company, No. C16-0096-JCC, 2016 WL 2930444, at *4 (W.D. Wash. May 19, 2016). However, an insured may assign its bad faith claim, and as an assignee, a third party would "step into the shoes" of the insured. See, e.g., Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 397-399, 823 P.2d 499, 507-509 (1992).
An insurer's duty of good faith applies to claims involving either first-party insurance or third-party insurance. See, e.g., St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., 165 Wn.2d 122, 130, 196 P.3d 664, 668 (2008).
An insurer's duty of good faith is separate from an insurer's duties under the insurance policy, and an insured may maintain a bad faith cause of action even if its insurer owes no duty to indemnify. See, e.g., Coventry Associates v. American States Ins. Co., 136 Wn.2d 269, 279, 961 P.2d 933, 936-937 (1998) (involving first-party insurance); St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., 165 Wn.2d 122, 132, 196 P.3d 664, 669 (2008) (involving third-party insurance).
Fundamentally, an insurer's duty of good faith connotes a duty to consider an insured's interests equally. See, e.g., Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 387, 391, 715 P.2d 1133, 1137, 1139 (1986).
The Washington Administrative Code (WAC) identifies various unfair claims settlement practices and prescribes minimum standards for acknowledging communications, investigating claims, and settling claims. Appendix B. An insurer's breach of these regulations is evidence of common law bad faith. See, e.g., Coventry Associates v. American States Ins. Co., 136 Wn.2d 269, 276-279, 961 P.2d 933, 936-938 (1998); St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., 165 Wn.2d 122, 131-132, 196 P.3d 664, 668-669 (2008).
An insurer's breach of the insurance policy is evidence of common law bad faith. See, e.g., Coventry Associates v. American States Ins. Co., 136 Wn.2d 269, 276-279, 961 P.2d 933, 935-938 (1998); St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., 165 Wn.2d 122, 132, 196 P.3d 664, 668-669 (2008).
To assert a viable cause of action for common law bad faith, an insured must prove that the insurer breached its duty of care and that the breach was "unreasonable, frivolous, or unfounded." See, e.g., Lloyd v. Allstate Ins. Co., 167 Wn. App. 490, 496, 275 P.3d 323, 326 (2012). The Washington Supreme Court has recognized, "Claims of bad faith are not easy to establish, and an insured has a heavy burden to meet." Overton v. Consolidated Ins. Co., 145 Wn.2d 417, 433, 38 P.3d 322, 329 (2002). See also Bridgham-Morrison v. National General Assurance Company, No. C15-927-RAJ, 2016 WL 2739452, at *4 (W.D. Wash. May 11, 2016); Lear v. IDS Prop. Cas. Ins. Co., No. C14-1040-RAJ, 2017 U.S. Dist. LEXIS 4909, at *8 (W.D. Wash. Jan. 11, 2017).
Whether an insurer's alleged act or omission was unreasonable, frivolous, or unfounded depends on the facts and circumstances that existed at the time of the alleged act or omission. See, e.g., Keller v. Allstate Ins. Co., 81 Wn. App. 624, 633-634, 915 P.2d 1140, 1145 (1996) ("To determine whether a defendant acted reasonably, fairly, or deceptively, it is necessary to consider the circumstances surrounding the allegedly improper act"); Anderson v. State Farm Mut. Ins. Co., 101 Wn. App. 323, 329-330, 2 P.3d 1029, 1033 (2000); Lloyd v. Allstate Ins. Co., 167 Wn. App. 490, 496, 275 P.3d 323, 326 (2012); Lear v. IDS Prop. Cas. Ins. Co., No. C14-1040-RAJ, 2017 U.S. Dist. LEXIS 4909, at *8 (W.D. Wash. Jan. 11, 2017).
An insured does not have a viable common law bad faith claim if the insurer simply made a good faith mistake. See, e.g., Coventry Associates v. American States Ins. Co., 136 Wn.2d 269, 280, 961 P.2d 933, 937-938 (1998) ("Of course, insurance companies, like every other organization, are going to make some mistakes. As long as the insurance company acts with honesty, bases its decision on adequate information, and does not overemphasize its own interests, an insured is not entitled to base a bad faith or CPA claim against its insurer on the basis of a good faith mistake"); Insurance Co. of State of Pennsylvania v. Highlands Ins. Co., 59 Wn. App. 782, 786-787, 801 P.2d 284, 286-287 (1990) ("[M]istakes and clumsiness alone do not amount to bad faith.... Neither denial of coverage because of a debatable coverage question nor delay, unaccompanied by an unfounded or frivolous reason, constitutes bad faith"); Lear v. IDS Prop. Cas. Ins. Co., No. C14-1040-RAJ, 2017 U.S. Dist. LEXIS 4909, at *8 (W.D. Wash. Jan. 11, 2017).
Whether an insurer acted in bad faith is a question of fact. See, e.g., St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., 165 Wn.2d 122, 130, 196 P.3d 664, 668 (2008). As such, a court may resolve that question on summary judgment if a reasonable person could only conclude that the insurer's act or omission was reasonable or unreasonable. Wichser v. Safeco Ins. Co., No. C15-738-RAJ, 2016 U.S. Dist. LEXIS 162929, at *9-*10 (W.D. Wash. Nov. 22, 2016).
§ 1.1.b. Duty — Insurers' Adjusters
Washington courts have reached different conclusions about whether an insured may assert a bad faith claim against an insurer's claim adjuster. See, e.g., Int'l Ultimate v. St. Paul Fire & Marine, 122 Wn. App. 736, 757, 87 P.3d 774, 787 (2004) (finding that insured could not assert bad faith claim against insurer's adjuster); Merriman v. Am. Guar. & Liab. Ins. Co., 198 Wn. App. 594, 611-613, 396 P.3d 351, 359-360 (2017) (declaring that insured could assert bad faith claim against insurer's adjuster). See also Lease Crutcher Lewis WA, LLC v. National Union Fire Ins. Co. of Pittsburgh, PA, No. C08-1862-RSL, 2009 U.S. Dist. LEXIS 97899, at *5-*7 (W.D. Wash. Oct. 20, 2009) (denying Rule 12(b) (6) motion to dismiss bad faith claim against insurer's adjuster, finding that an adjuster owes an insured a duty of good faith).
§ 1.1.c. Duty — Insureds
Insureds also owe a duty of good faith. RCW 48.01.030; Appendix A. See also, Public Employees Mut. Ins. Co. v. Kelly, 60 Wn. App. 610, 619, 805 P.2d 822, 827 (1991); Cox v. Continental Cas. Co., No. C132288-MJP, 2014 WL 6632371, at *11 (W.D. Wash. Nov. 21, 2014) (denying insured's motion to dismiss an insurer's affirmative defense of comparative bad faith, observing that the Washington Administrative Code imposes burdens on insureds and that a Washington statute requires the trier of fact to consider comparative fault).
As an analytically distinct but related matter, if an insured's attorney pursues an insurance bad faith claim in bad faith, that attorney can be held personally liable for the attorneys' fees and costs that are reasonably attributable to the attorney's conduct. See, e.g., Nielsen v. Unum Life Ins. Co. of America, 166 F.Supp.3d 1193, 1197-1198 (W.D. Wash. 2016).
§ 1.2. Harm and Remedies
§ 1.2.a. Tort Damages — Emotional Distress — Policy Benefits
Because bad faith is a tort, a plaintiff is not limited to economic damages, but may seek to recover tort...