No harm, no foul! – A west coast primer on bad faith exposure
July, 2006
Two recent decisions—one from Washington and one from California—further clarify the elements of an action for insurance bad faith and how the preconditions for such an action vary from state to state. They also highlight how insurers in any state can avoid bad faith exposure.
Washington Court Grants Summary Judgment Against Bad Faith Claim
In Werlinger v. Clarendon National Insurance Company, 129 Wn. App. 804, 120 P.3d 593 (2005), the Washington Court of Appeals upheld dismissal on summary judgment of the insureds' bad faith claim against their automobile insurer on grounds the insureds could not prove damages. The court reiterated that "[t]o succeed on a bad faith claim, the policy holder must show the insurer's breach of the insurance contract was ‘unreasonable, frivolous or unfounded.'" Werlinger, 129 Wn. App. at 808, citing Smith v. Safeco Ins. Co., 150 Wn.2d 478, 484, 78 P.3d 1274 (2003). It then noted that "[j]ust as any other tort, the insured must prove duty, breach of duty, and the damages proximately caused by any breach of duty." Id. at 808. It thus concluded that, even though bad faith normally presents a question of fact, the insurer is "entitled to a dismissal on summary judgment" on two alternate grounds: (1) "if, after viewing the facts in the insured's favor, a reasonable person could only conclude that [the insurer]'s action were reasonable," or (2) "[a]lternatively, because harm is an essential element, summary judgment in favor of the insured is appropriate if a reasonable person could only conclude that the insured suffered no harm." Id.
Because the insureds in Werlinger had filed for bankruptcy (which filing the court noted was unrelated to the coverage dispute, pre-existed the accident as a Chapter 13 filing, and post-accident became a Chapter 7 due to the insureds' desire to avoid personal liability for the accident), the court found the insureds were "at no time . . . subjected to greater liability because of their [insurer's] alleged delay in resolving the coverage issue." Id. at 809. Because the bankruptcy "shielded" the insureds, they "suffered no harm," so the court dismissed their bad faith and Consumer Protection Act claims as a matter of law. Id.
California Court Grants Summary Judgment Against Bad Faith Claim
Meanwhile, in Benavides v. State Farm General Insurance Company, 39 Cal. Rptr. 3d (Cal. Ct. App. 2006), the California Court of Appeal held that, in most circumstances, "absent coverage, there is no tort liability for improperly investigating a first-party insurance claim whether the insurer's conduct is characterized as an implied covenant breach [i.e., a contract claim] or negligence [i.e., a tort claim]." Benavides, 39 Cal. Rptr. 3d at 656.
Insurers and practitioners in Washington will immediately recognize the holding in Benavides runs counter to Washington law, which expressly permits a policyholder to prosecute a claim for bad faith failure to investigate or for negligent investigation, even if there was no coverage due under the policy. See Coventry Assocs. v. American States Ins. Co., 136 Wn.2d 269, 961 P.2d 933 (1998). As Washington treats the contractual coverage determination separate from the tort of bad faith, an insurer with no coverage obligation can still be liable for bad faith if it correctly denies a claim but does so without properly and thoroughly investigating first.
Washington does recognize some logical limits on insurers' liability for claims handling. For example, in Capelouto v. Valley Forge Insurance Company, 98 Wn. App. 7, 13, 990 P.2d 414 (1999), the court held that it is not bad faith for an insurer to halt its investigation short of determining the efficient proximate cause of a loss, where all of the potential candidates are separately excluded by the policy. However, insurers can still be liable in tort for correctly denying coverage that was never owed under the insurance contract if the claim was handled unreasonably. Fortunately, Werlinger tempers this rule with the proviso that the insured must prove some actual harm resulting from the unreasonable claim handling. In other words, "no harm, no foul."
Still No Tort of First-Party Bad Faith in Oregon
In Oregon, there is no such thing as the tort of first-party bad faith. Employers' Fire Ins. Co. v. Love It Ice Cream Co., 64 Or. App. 784, 670 P.2d 160, 165 (1983) ("[A]n insurer's bad faith refusal to pay policy benefits to its insured sounds in contract and is not an actionable tort in Oregon."). Thus, the recent cases out of Washington and California will not bear upon Oregon insurance law; however, the cases illustrate the scrutiny to which an insurer's handling of a claim may be subjected, years after the fact. As always, insurers in every state should handle claims in a manner that will hold up to such scrutiny.