Opinion ID: 1161058
Heading Depth: 1
Heading Rank: 4

Heading: Issue # 2Is There a Presumption of Harm?

Text: As noted above, to maintain a cause of action based on an insurer's bad faith or CPA violation the insured must establish it was harmed. While we hold the cause of action is available to first party insureds, we decline to hold in the first party context a rebuttable presumption of harm exists once an insured acts in bad faith. While a rebuttable presumption of harm exists as a result of an insurer's bad faith act in the third party context, that is so because insurers have a heightened duty of good faith in such situations. See Tank, 105 Wash.2d at 387, 715 P.2d 1133 (the potential conflicts of interest between insurer and insured inherent in this type of defense [reservation of rights] mandate an even higher standard: an insurance company must fulfill an enhanced obligation to its insured as part of its duty of good faith). Because the potential conflict of interest does not exist in the first party context, we do not think a rebuttable presumption of harm is warranted. This is not to say that a first party insured suffers no harm when its insurer conducts a bad faith investigation of the claim. When an insurer fails to adequately investigate an insured's claim, the insured must either perform its own investigation to determine if coverage should have been provided or take no action at all. In either situation, the insured does not receive the full benefit due under its insurance contract. American States, however, argues that just because an insured pays a premium, it is not entitled to specific investigatory services. Coventry did not pay a premium for investigation; it paid a premium for insurance. The premium is consideration for the contract, not for insurance services, whether claims handling, underwriting, or commissions to agents. No part of the premium is dedicated to any particular cost of insurance or of conducting insurance business. Resp't Answer to Pet. for Review at 15. [4] American States also asserts that wrongfully denying an insured's claim and the attendant consequences of doing so are sufficient incentives to keep insurers from acting in bad faith. While the threat of the consequences of wrongfully denying an insured's claim might provide incentive to insurers to act in good faith as a matter of policy, that argument ignores the fact the duty of good faith is separate from the duty to pay for a claim when required to do so. Contrary to American States' and amicus Insurance Companies' assertions, an insured receives more for its premium than just the possibility its claim will be covered when appropriate. In the relationship between the insured and insurer, the insurer receives both the premium and control over the arrangement. In first party situations, the insurer establishes the conditions for making and paying claims. The insurer evaluates the claim, determines coverage, and assesses the monetary value of the coverage. Thus, the insurance contract brings the insured a certain peace of mind that the insurer will deal with it fairly and justly when a claim is made. [5] Conduct by the insurer which erodes the security purchased by the insured breaches the insurer's duty to act in good faith. See William M. Shernoff et al., Insurance Bad Faith Litigation § 3.04[5], at 3-26 (1991). The record establishes that Coventry incurred certain expenses as a result of American States' bad faith investigation. For example, Coventry hired geotechnical and civil engineers to review the facts and circumstances surrounding the incident causing damage to the construction site. Coventry also hired insurance experts to determine if coverage was denied in bad faith. To the extent Coventry can establish it incurred expenses as a direct result of American States' breach of contract and bad faith actions, it was harmed.