Opinion ID: 1161058
Heading Depth: 1
Heading Rank: 3

Heading: Issue # 1Does a First Party Insured Have a Cause of Action for Bad Faith Investigation in Washington?

Text: This issue is one of first impression in the context of a first party action. In the context of a third party reservation of rights case, once an insured meets the burden of establishing an insurer's bad faith, a rebuttable presumption of harm arises. Safeco Ins. v. Butler, 118 Wash.2d at 390, 823 P.2d 499. See also Kirk v. Mount Airy Ins. Co., 134 Wash.2d 558, 564, 951 P.2d 1124 (1998) (Once the insurer breaches an important benefit of the insurance contract, harm is assumed, the insurer is estopped from denying coverage, and the insurer is liable for the judgment.). In this case, the Court of Appeals did not discuss Kirk and held that Safeco Ins. does not authorize bad faith or Consumer Protection Act claims in the absence of coverage. Coventry Assocs., 86 Wash.App. at 850, 939 P.2d 1245. In distinguishing Safeco Ins., the Court of Appeals concluded that harm is rebuttably presumed in that narrow circumstance where the insurer's promise to defend would entitle the insured to coverage under promissory estoppel if the insured proves bad faith. Coventry Assocs., 86 Wash.App. at 850, 939 P.2d 1245. American States agrees and argues that Safeco Ins. and Kirk have no application to first party claims because [t]he rationale for imposing the presumption of harm in the context of third-party coverage does not arise in a first-party context. Resp't Supplemental Br. at 7. Coventry argues our decisions in Safeco Ins. and Kirk control this case. Coventry asserts that the same policy underpinnings of Safeco Ins. and Kirk, upon which this court based its rebuttable presumption of harm analysis, apply here. Coventry also argues an insurer's duties to an insured are not limited to the payment of a covered claim. Coventry states: Insurance consumers pay for and are entitled to the security that their insurers will investigate fairly and honestly. Failure to recognize a cause of action in the instant circumstances will encourage insurers to litigate, not investigate, significant property damage claims. Pet. for Review at 11-12. Coventry relies on Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 504, 838 P.2d 1265 (1992). In that case, the plaintiff's insurer denied partial payment to the plaintiff insured for medical treatment the insurer deemed unnecessary. The insured brought suit for breach of contract and bad faith. The jury found for the insurer on the contract claim but awarded the insured compensatory damages on her bad faith claim. The Arizona Supreme Court affirmed, stating, a plaintiff may simultaneously bring an action both for breach of contract and for bad faith, and need not prevail on the contract claim in order to prevail on the bad faith claim, provided plaintiff proves a breach of the implied covenant of good faith and fair dealing. Deese, 172 Ariz. at 509, 838 P.2d 1265. In so holding, the Arizona Supreme Court relied on its previous decision in Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986), where that court faced a similar issue and declined to adopt the insurer's reasoning that actionable bad faith is limited only to the unfounded refusal or delay in payment of a valid claim. Instead, the Rawlings court stated: Failure to perform the express covenant to pay the claim is not the sine qua non for an action for breach of the implied covenant of good faith and fair dealing. . . . . The implied covenant is breached, whether the carrier pays the claim or not, when its conduct damages the very protection or security which the insured sought to gain by buying insurance. Rawlings, 151 Ariz. at 157, 726 P.2d 565 (citing Noble v. National Am. Life Ins. Co., 128 Ariz. 188, 189, 624 P.2d 866 (1981)). See also White v. Unigard Mut. Ins. Co., 112 Idaho 94, 730 P.2d 1014 (1986) (holding an insured may sue for bad faith, even if the claim is not covered, when the insurer intentionally and unreasonably delays payment on a claim and the delay harms the insured). The Court of Appeals here distinguished Deese and White on the ground that, absent a covered loss, the failure to investigate must amount to a substantial impact on the insured in order to provide the basis of a bad faith or CPA claim. Coventry Assocs., 86 Wash.App. at 849-50, 939 P.2d 1245. American States would have us adopt the same no harm, no foul rule, in which bad faith is not actionable, as a matter of law, when the insured's policy does not provide coverage for the loss. We decline to do so. We hold an insured may maintain an action against its insurer for bad faith investigation of the insured's claim and violation of the CPA regardless of whether the insurer was ultimately correct in determining coverage did not exist. An insurer's duty of good faith is separate from its duty to indemnify if coverage exists. This result creates no insurmountable burden on the insurer. The insurer is only required to fulfill its contractual and statutory obligation to fully and fairly investigate the claim. The problem arises when the insurer fails to investigate, in bad faith, thereby placing the insured in the difficult position of having to perform its insurer's statutory and contractual obligations. Although American States' all or nothing approach is appealing, it does not recognize the jurisprudence this court has established regarding the tortious nature of a bad faith claim nor does it recognize that insurers have a general duty of good faith in their actions with their insureds. Tank v. State Farm Fire & Cas. Co., 105 Wash.2d 381, 385-86, 715 P.2d 1133 (1986) (The duty to act in good faith or liability for acting in bad faith generally refers to the same obligation.... the fiduciary relationship existing between the insurer and insured.... This fiduciary relationship ... implies more than `honesty and lawfulness of purpose'.... It implies `a broad obligation of fair dealing' and a responsibility to give `equal consideration' to the insured's interests.) (emphasis added) (quoting Tyler v. Grange Ins. Ass'n, 3 Wash.App. 167, 173, 177, 473 P.2d 193 (1970)). [2] See also Fireman's Fund Ins. Cos. v. Alaskan Pride Partnership, 106 F.3d 1465, 1470 (9th Cir.1997) (insurer's reliance on First Circuit Court of Appeals case holding that failure to conduct a reasonable investigation could not alone support a finding of bad faith is misplaced because [t]hat is not true of Washington law). Under American States' proposed rule, insurers would have a duty of good faith toward their insureds only when coverage was required. That reasoning begs the question and runs counter to our previous holdings. [3] This is not to say an insurer is required to pay claims which are not covered by the contract or take other actions inconsistent with the contract. 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. Here, the Court of Appeals procedural/substantive distinction is not based on the insurance contract or the insured's statutory obligations. In fact, under the insured's statutory obligations, the question becomes a precise one: either the insurer complies with those duties or it does not. When the insurer does not comply with those obligations in bad faith, a cause of action exists. We agree with one commentator who states: The implied covenant of good faith and fair dealing in the policy should necessarily require the insurer to conduct any necessary investigation in a timely fashion and to conduct a reasonable investigation before denying coverage. In the event the insurer fails in either regard, it will have breached the covenant and, therefore, the policy. 1 Allan D. Windt, Insurance Claims & Disputes: Representation of Insurance Companies and Insureds § 2.05, at 38 (3d ed.1995).