Coverage not required for claim of bad faith

While we’re seeing Katrina cases gutted before trial, the Supreme Court in Washington (state) has ruled on one where there was nothing to gut but the plaintiff’s claim of bad faith.

Insurance Law Hawaii reports on Washington Court Allows Bad Faith Action for Delay Even If No Coverage.

In a decision policy holders will appreciate, the Washington Supreme Court recently held the insured could pursue bad faith claims for delay in processing the claim even when there is no coverage under the policy. See St. Paul Fire and Marine Ins. Co. v. Onvia, Inc., 2008 Wash. LEXIS 1055 (Wash. Nov. 26, 2008).

The case came to the Court on certified questions from the U.S. District Court, Western District of Washington. St. Paul did not act in bad faith in refusing to defend, settle, or indemnify against a third-party liability claim because there was no coverage under the policy. But the issue was whether the insured could pursue common law bad faith and claims under the Consumer Protection Act based on St. Paul’s delay in handling the claim.

The insured tendered the suit to St. Paul. It took nine months for St. Paul to deny coverage and a defense. The insured settled the underlying suit, which included assigning its rights to sue St. Paul. The suit for declaratory relief alleged St. Paul violated a number of insurance claims-handling regulations in bad faith, including failing to timely acknowledge and act upon the notice of the claim and tender of defense, and by failing to promptly or reasonably investigate the claim.

The Court decided St. Paul had acted in bad faith even though there was no coverage under its policy. Under Washington law (similar to Hawai`i law), every insurer had a duty to act promptly, in both communication and investigation, in response to a claim or tender of defense. Therefore, a third party insured had a cause of action for bad faith claims handling that was not dependent on the duty to indemnify, settle, or defend. However, the insured could not take advantage of the remedy of coverage by estoppel with the harm presumed. Instead, the insured had to prove actual harm and “damages were limited to the amounts incurred as a result of the bad faith . . . as well as general tort damages.”

The Court also held that the insured could bring suit under the Consumer Protection Act even though there was no duty to settle, indemnify, or defend. But again, the remedy would be limited to the statutory remedies available to any successful claimant under the Consumer Protection Act.

Under Hawaii law, a claim for the tort of bad faith does not turn on whether the claim for benefits are due, but instead turns on the conduct of the insurance company in handling the claim…

Allegations that Katrina claims handling was violating Mississippi’s Consumer Protection Act were among those made by Attorney General Hood following the storm – making the mention by Washington’s Supreme Court  particularly interesting.

Reader CLS picked up on the post from ILH and the mention of Consumer Protection and noted a related consideration, the Brandt decision on attorney’s fees in cases with bad faith proven.

In Brandt v. Superior Court (1985) 77 Cal.3d 813, the California Supreme Court held a finding of bad faith authorizes the trial court to award the insured attorneys’ fees incurred in recovering contract benefits.  This case considers the correct manner to determine the amount of those fees…

In this case, the Cassims had signed a contingency fee agreement with their attorney that gave him 40% of all sums recovered.  Allstate contended the fee award should have been 40% of $40,856, the amount of the disputed contract benefits.  The Supreme Court rejected that view.  The Court reasoned that this assumed that an insured would never pay more than 40% of the contract recovery to obtain that recovery.  The Court stated that was not necessarily true.  The Court said the only limitation is that the fees not exceed the effort attributable to the attorney’s work to obtain the benefit.  That may exceed, in some cases, the benefits entirely.

The Court noted that in this case, many of the issues concerning the contract and tort recovery were intertwined.  Thus, fees were not limited to 40% of the benefits owing under the contract.  However, recovery could not be based on the entire compensatory award.  Rather, the award should have been for a portion of any nonsegregated fees and costs for pursuing the joint claims.  The trial court was to exercise discretion in apportioning the fees.  The trier of fact was to determine the percentage of legal fees paid to the attorney that reflected work attributable to obtaining the contract recovery.  No portion of legal fees attributable to punitive damages could be awarded.  The fees could never exceed the legal fees for the combined tort and contract recovery…

The Court held the insured bore the burden of proving how the fees for legal work were apportioned to the contract and tort.  Further, the trial court retained discretion to disregard any fee agreement that appeared to be manipulated to increase recovery…

Any hope by the insurance industry that Brandt would be overturned was rejected by both the majority and the dissent.  The majority decision will leave trial courts with a complicated process for determining how such fees are to be awarded.

I gather from CLS that questions about violations of consumer protections have not been raised in Katrina litigation in Louisiana.  In Mississippi, on the other hand, those questions are still on the table.

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