Washington Legislature passes "Insurance Fair Conduct Act"
April, 2007
The Washington Legislature has passed an "Insurance Fair Conduct Act," which, unless vetoed by the Governor, will take effect on August 21, 90 days after the Legislature adjourned. The Insurance Fair Conduct Act will have a substantial effect on insurers doing business in Washington, particularly in that it provides for punitive damages for insurer misconduct—possibly including mere negligent misconduct.
Under current Washington law, the only basis for punitive damages is the Consumer Protection Act (CPA), which permits the court, in its discretion, to order trebling of actual damages up to a limit of $10,000 per claim. An insurer is liable under the CPA if it acts in bad faith or unreasonably violates a Washington Administrative Code (WAC) provision regulating insurance trade practices. And an insurer who denies coverage can be liable in bad faith for the denial of benefits only if the denial was "frivolous, unfounded, or unreasonable"—i.e., if there was no reasonable justification for the denial.
An insurer violates the Insurance Fair Conduct Act (1) by "unreasonably den[ying] a claim for coverage or payment of benefits" or (2) by failing to comply with the trade practices WACs. Arguably, the "unreasonable" standard for coverage denials is a mere negligence standard and requires less culpability than the "frivolous and unfounded" standard that currently applies.
An insurer's violation of the Insurance Fair Conduct Act entitles a "first party claimant" (defined in the Act to include any person who has a right to assert a claim for coverage) to bring suit to recover "actual damages sustained." In addition, the court may, in its discretion, "increase the total award of damages to an amount not to exceed three times the actual damages." To the extent the Act can be interpreted to permit imposition of punitive damages for negligent conduct, it may be subject to constitutional challenge. Insurers can anticipate that litigation will be necessary to sort out the role of the court in deciding whether a denial is "unreasonable" and in determining what standards should apply when awarding punitive damages.
The Act also provides that a prevailing claimant shall recover its reasonable attorney fees and "actual and statutory costs, including expert witness fees." Under current law, a claimant who has prevailed in a coverage dispute is entitled to the same relief, under the Olympic Steamship doctrine. With regard to claim handling disputes under the CPA, however, a claimant shall recover reasonable attorney fees but only statutory costs, which are limited and do not include expert witness fees.
The Insurance Fair Conduct Act requires that a claimant, before suing under the Act, provide 20 days' notice to the insurer and to the Insurance Commissioner, and any statute of limitations is tolled up to 20 days by the notice. The Act does not require any response from the insurer or Insurance Commissioner to the notice.
Although subject to dispute, the requirements of the Act should apply prospectively only—that is, a cause of action under the Act will apply only to an insurer's acts or omissions occurring on and after the day the Act becomes effective.