Court Opinion

ID: 4711437
Source: CourtListenerOpinion
Date Created: 2021-08-12 00:36:54.558163+00
Date Added: 2024-06-11T08:07:07.718760
License: Public Domain

Durham, C.J.
(dissenting) — In Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992), we held that (1) harm is rebuttably presumed once the insured meets its burden of establishing that an insurer acted in bad faith in handling a claim under a reservation of rights; and (2) an insurer is estopped from denying coverage when it acts in bad faith in handling a claim under a reservation of rights. The majority holds that this rebuttable presumption and coverage by estoppel apply when an insurer in bad faith fails to defend its insured. However, Butler should be limited to the defense under a reservation of rights context. I, therefore, dissent.
I
In Butler, some teenagers vandalized Butler’s mailbox. Butler shot at their truck, injuring one of them who then *566sued. Butler tendered the defense to his personal liability insurer, Safeco, which disputed coverage because Butler intentionally fired at the victim. Yet, Safeco agreed to defend, reserving the right to contest coverage. Butler settled with the plaintiff, stipulated to damages, and assigned his bad faith claim to the plaintiff. The trial court granted Safeco’s summary judgment motion regarding coverage, but denied it regarding Safeco’s bad faith claim.
The court recognized the potential for conflicts of interest to arise when insurers defend under a reservation of rights. In order to discourage insurers from conducting the defense to their own advantage on coverage issues, the court shifted the burden of proof regarding the element of harm and estopped insurers from denying coverage when they defend in bad faith under a reservation of rights.
First, the court held that harm is rebuttably presumed once the insured meets its burden of establishing bad faith.4 The court looked to jurisdictions that presume prejudice where the insurer assumes the defense and then attempts to withdraw.5 The court reasoned that, although those cases involved insurers’ attempts to withdraw from representation, “their reasoning applies equally to situations where the insurer undertakes a defense under a reservation of rights and then acts in bad faith.”6 In particular, the court was persuaded that:
The shifting of the burden ameliorates the difficulty insureds have in showing that a particular act resulted in prejudice. It also recognizes the fact that loss of control of the case is in itself prejudicial to the insured.[7]
Second, the court held that where an insurer acts in bad faith in handling a claim under a reservation of rights, the *567insurer is estopped from denying coverage.8 The court rejected Safeco’s argument that recovery should be limited to contract damages. The court reasoned that bad faith breach of the duty to defend violates the fiduciary aspects of the relationship between the insurer and the insured and, therefore, sounds in tort.9 Moreover, the court was concerned that without the coverage by estoppel remedy, the insurer could act in bad faith without risking any additional loss beyond contract damages.10 Thus, the coverage by estoppel remedy was adopted to provide a disincentive to bad faith insurer conduct when defending under a reservation of rights.
II

Presumption of harm

The majority suggests that whether an insurer defends in bad faith or in bad faith refuses to defend at all, the insured faces similar problems of proving harm.11 The majority reasons that in the bad faith failure to defend context, the insured faces the difficult task of establishing that either coverage would have been available or liability against the insured would have been avoided had the insurer undertaken the defense.12 Yet, it is precisely because of the speculative nature of these assumptions that it is inappropriate to extend the presumption of harm rule to the bad faith failure to defend context.
When an insurer defends under a reservation of rights, the insured loses control over the defense. As the Butler court observed, the loss of control itself is prejudicial.13 The presumption of harm when an insured entrusts the defense *568to the insurer is in response to the difficulty of showing that the insured is demonstrably worse off as a result of the insurer having controlled the defense to its own advantage. Despite the lack of demonstrable harm, it is reasonable to assume that an insurer has caused harm when it has actively tried to disadvantage its insured.
This is wholly different from the outright failure to defend. In this context, the insured retains complete control over the defense and may conduct it free from the risk of active self-dealing, which can arise when the defense is entrusted to the insurer under a reservation of rights. It is much more speculative to assume that the insured has actually suffered harm when the insured has retained full control of the defense. Thus, it is inappropriate to presume harm in cases alleging bad faith failure to defend.
The majority’s decision to the contrary reveals a misunderstanding of the role of case authority in our jurisprudence. The majority places great weight on the Butler court’s sweeping dicta that we presume harm in any case of insurer bad faith.14 Yet, it is a fundamental principle of jurisprudence that “general statements . . . are to be confined to the facts and issues of that particular case.”15 A statement’s true sweep is determined by its case-by-case application. Perhaps someday we will have presumed harm in enough bad faith insurance cases to give authority to the proposition that we presume harm in any case of insurer bad faith. However, until today we have held that there is a presumption of harm only once—when an insurer defended in bad faith under a reservation of rights. Since Butler was the first and only time we have presumed harm for insurer bad faith, Butler itself refutes the suggestion that we always presume harm.
Moreover, the Butler court cited no authority for its statement that we presume harm in any case of bad faith. Indeed, the Butler court avoided the rule that prejudice is *569not presumed except in extreme cases by asserting, without support, that bad faith is an “extreme case.”16 The only support for the presumption-of-harm rule was drawn from other jurisdictions that presume harm when an insurer assumes the defense and later attempts to withdraw.17 The Butler court summarily concluded that attempting to withdraw after having assumed the defense was the same as defending under a reservation of rights.18
The only meaningful analysis in Butler on this issue was the public policy justification that burden shifting (1) ameliorates the insured’s difficulty of proving harm; (2) recognizes that the insured’s loss of control over the defense was prejudicial; and (3) has a disincentive effect.19 While two of the three factors are present in the failure to defend context, the second factor identifies a harm that is unique to the reservation of rights context. When an insurer refuses to defend, the insured retains complete control over the defense. This, in my opinion, sufficiently weighs against extending the rule to the present case.

Coverage by estoppel

The majority reasons that in order to preserve the disincentive effect of Butler, the same coverage by estoppel remedy must apply in the context of an insurer’s bad faith failure to defend.20 If there is no coverage by estoppel remedy for bad faith failure to defend, the majority predicts that insurers may refuse to defend rather than risk coverage by estoppel by undertaking the defense under a reservation of rights.21
I agree that additional remedies must be available to distinguish bad faith failure to defend from wrongful, yet good faith, failure to defend. I am not, however, persuaded *570that coverage by estoppel is necessary to achieve this end. As the Butler court observed, bad faith breach of the duty to defend sounds in tort.22 Generally, tort damages are the amount that will adequately compensate for the loss suffered as the direct and proximate result of the wrongful act.23 Thus, to the extent that an insurer’s bad faith failure to defend is the direct and proximate cause of loss beyond the policy terms, an insured would be entitled to be compensated for such loss. Moreover, the Consumer Protection Act provides significant disincentive to insurer bad faith conduct,24 including treble damages of up to $10,000 and attorney fees.25 These extra-contractual remedies are sufficient disincentive to bad faith insurer conduct. Thus, I would hold that insurers who in bad faith fail to defend an insured are not estopped from raising coverage defenses.
Dolliver and Alexander, JJ., concur with Durham, C.J.

Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 390, 823 P.2d 499 (1992).

Butler, 118 Wn.2d at 391 (citing cases).

Butler, 118 Wn.2d at 392.

Butler, 118 Wn.2d at 392 (citations omitted).

Butler, 118 Wn.2d at 392.

Butler, 118 Wn.2d at 393-94.

Butler, 118 Wn.2d at 394.

Majority at 563.

Id.

Butler, 118 Wn.2d at 392 (citations omitted).

Majority at 562.

In re Estate of Burns, 131 Wn.2d 104, 113, 928 P.2d 1094 (1997).

Butler, 118 Wn.2d at 391.

Id.

Butler, 118 Wn.2d at 392.

Id.

Majority at 564-65.

Id.

Butler, 118 Wn.2d at 393-94.

Puget Sound Power & Light Co. v. Strong, 117 Wn.2d 400, 403, 816 P.2d 716 (1991).

Under the Consumer Protection Act, insureds may bring a private action against their insurers for breach of the duty of good faith. Leingang v. Pierce County Med. Bureau, Inc., 131 Wn.2d 133, 149, 930 P.2d 288 (1997) (citing Tank v. State Farm Fire & Cos. Co., 105 Wn.2d 381, 394, 715 P.2d 1133 (1986); RCW 19.86.090).

RCW 19.86.090.