Category: Insurance Fair Conduct Act

Court of Appeals Rules Insurer Cannot Escape IFCA Liability by Belatedly Paying Claim After Getting Sued

Washington consumers enjoy the protection of the Insurance Fair Conduct Act (a/k/a “IFCA”). IFCA permits insurance policyholders to sue if their insurer refuses to pay their claim unreasonably. The plaintiff can recover up to three times the insurance benefits plus their attorneys’ fees.

The reason the law provides these additional protections is because insurance is a unique product. You pay premiums today. In exchange, the insurance company promises to take care of you when a loss happens.

This can feel like kind of a weird arrangement. Compared to other consumer transactions, it puts the buyer in a vulnerable position. When you buy a car, you drive it off the lot. When you buy software, you download it. When you buy groceries, you take them home.

But when you buy insurance, you pay up front and get (for the moment) nothing in return except a promise.

And the person in charge of keeping that promise is the same person who stands to lose money if the promise is kept. The fox guards the henhouse. Your insurance adjuster has the only job in the world where, if they do their job right and honestly, their employer loses money.

What’s more, if the company doesn’t keep that promise, you’re much worse off than if other consumer transactions go awry. If your car turns out to be a lemon, you can go buy a new car. But if your insurer wrongfully denies coverage after a loss, you can’t go back in time and buy retroactive insurance coverage from another insurance company.

In other words, if the insurance company succumbs to the powerful financial incentive against keeping the promise it made in exchange for your premium dollars, you’re up a creek without a paddle.

And, if the law allowed insurers to wrongfully deny claims with no consequence besides perhaps eventually being ordered to pay the claim by a jury years later, insurers would just deny every claim and only pay the handful of policyholders who sue.

That would be really bad. Society needs insurance. Most of us are compelled to purchase it. You can’t drive without auto coverage. Many folks can’t buy a home without PMI. Visiting the doctor without health insurance can be nightmarish.

That’s why the law lets insurance consumers recover more than just the dollar amount the insurance company should have paid up front.

This brings us to the Washington Court of Appeals’ recent decision in Labeaume v. First National Insurance Company of America. Jane Labeaume was hurt in a car crash. The other driver was at fault. But they had too little insurance coverage to pay for Labeaume’s injuries.

So, Labeaume made a claim with her own insurance company for Underinsured Motorist Insurance benefits. But her insurance company refused to pay.

Labeaume sued her insurer under IFCA. Before the IFCA claim was decided, the company was ordered to pay her the additional insurance benefits during a preliminary phase of the lawsuit. The company immediately paid.

Then, the company asked the court to throw out Labeaume’s IFCA claim. “We paid the benefits” it said. “How can we get sued under IFCA if we paid?”

“Nice try” said the Court of Appeals. IFCA, the court explained, has a strong policy of protecting insureds. That means, among other things, that insureds like Labeaume shouldn’t have to file suit just to get the benefits the insurance company should have paid on time and without a fuss.

Thus, the court held that payment of insurance benefits after a court determines that the benefits are owed does not prevent an IFCA claim where the decision not to pay pre-suit was unreasonable.

This decision adds to the line of rulings applying IFCA in light of its purpose of protecting insureds.

Washington Federal Court Helps Clarify Meaning of IFCA’s “Payment of Benefits” Provision

In 2007, Washington voters approved the Insurance Fair Conduct Act (“IFCA”). IFCA gives people recourse if their insurance company unreasonably refuses to pay their insurance claim. Recourse under IFCA includes important relief that consumers couldn’t previously get, including punitive damages up to three times the amount of their loss and attorneys’ fees. This was considered a big deal.

Insurers, naturally, have urged courts to read IFCA narrowly. Like any new statute, judges applying it in the first instance have to consider how the language approved by the voters applies to the facts of particular cases. So the first few batches of rulings on a new law like IFCA often have a big impact on how that law applies in the real world.

One way insurers have tried to limit IFCA’s reach is by arguing it doesn’t apply to a dispute about how much the insurance company pays on an insurance claim. The language approved by the voters states that IFCA applies to an insurance policyholder who is:

“unreasonably denied a claim for coverage or payment of benefits by an insurer[.]”

So if the company denies the claim and refuses to pay anything, IFCA obviously applies. What about where the insurer accepts the claim and then pays less than the value of the loss?

This happens frequently. For example, a homeowner has a house fire. They get a contractor’s bid to repair the home. It will cost $100,000. They make a claim to their homeowners’ insurance company. The insurance company tells them the loss is covered, but the company will only pay $50,000. Does IFCA apply?

“No”, according many insurers who have taken this issue to court. These companies’ creative lawyers have reasoned that paying less than the value of the claim isn’t the same as “denying a claim” or refusing “payment of benefits.” “After all,” the company says, “we didn’t deny coverage, and we did pay some benefits.”

A recent decision from the Washington federal court clarifies that this isn’t what the voters intended when they passed IFCA.

In the recent decision Kyu-Tae Jin v. GEICO Advantage Ins. Co., No. 2:22-cv-1714, (W.D. Wash. Nov. 2, 2023), a consumer sued their insurance company after the insurer failed to pay all of the Uninsured Motorist benefits they alleged were owed under their insurance policy.

The policyholder asked the insurer to pay the entire amount of his policy limits, which were $100,000. The insurance company offered to pay $2,000. The policyholder, as you might expect, sued for violation of IFCA, arguing the decision was unreasonable.

The insurance company asked the federal court to throw out the case before trial. The company’s argument boiled down to: “even if our decision wasn’t reasonable, we didn’t deny coverage, and we didn’t refuse to pay benefits–the policyholder just thinks we should have paid more.”

The federal court disagreed. It emphasized that paying any amount at all can’t immunize an insurer from an IFCA claim. The question for IFCA depends on whether the amount the company paid in benefits was “reasonable based on the information it had.”

So, the court reasoned, if the insurance company’s offer to pay $2,000 in response to a claim for $100,000 was unreasonable under the circumstances, the company would violate IFCA. Under the facts of the particular case, the court ruled a jury had to decide that question.

This interpretation would seem to make sense. It’s hard to imagine that the voters who approved IFCA in 2007 intended that an insurance company could get itself off the hook by paying $1 on a $1 million claim.

This decision helps provide some valuable clarity regarding IFCA’s scope.

Know Your Rights Under Washington’s Insurance Fair Conduct Act

Washington State’s Insurance Fair Conduct Act (a/k/a “IFCA”) provides important legal protections for insurance policyholders. IFCA was passed by the legislature and then ratified by the voters in 2007. IFCA was enacted based on lengthy testimony in legislative hearings from industry experts and consumer advocates about how insurers abused their policyholders despite existing laws.

IFCA prohibits insurers from unreasonably denying coverage or payment of benefits under an insurance policy. There are some important differences between denying “coverage” versus denying “benefits.”

An insurer denies “coverage” when it refuses to pay a claim on the basis the claim isn’t covered under the policy or is excluded from the policy. Denying coverage is pretty straightforward. For example, if your homeowner’s insurer refuses to pay for damage to your home in a fire because you were renting the house on airbnb and they say the policy excludes property used for business purposes, that’s a denial of coverage. Or if your disability insurance company refuses to pay benefits because they claim you don’t meet the definition of disability under the policy, that’s also a denial of coverage.

“Benefits” can be more complicated. The benefits you get under an insurance policy are broader than just whether the loss is covered. For example, you get the benefit of a full and fair investigation of your claim at the insurer’s expense. That means an insurer can violate IFCA even where they agree the loss is covered but refuse to pay all the benefits owed under the policy, for instance, because they refused to investigate all the evidence and thus miss important parts of the claim.

IFCA gives policyholders important remedies where an insurer violates IFCA.

First, the policyholder gets paid for their losses resulting from the insurer’s violation. This typically entails the amount of the claim the insurer refused to cover, or the amount of the benefits the insurer refused to pay.

Second, the policyholder gets paid their attorneys’ fees and litigation costs. That’s important because paying lawyers and expert witnesses can get expensive. If you have to go to court to recover $100,000 in policy benefits but litigation costs you $90,000 in lawyers’ and experts’ fees, the $10,000 you’re left with is a hollow victory. IFCA fixes this problem by requiring the insurer to pay these costs, allowing the policyholder to keep the insurance payment they should have received without having to go to court.

Third, the policyholder can recover triple their damages if the court decides the insurer’s conduct was so bad as to warrant extra relief. This often depends on whether the insurer violated Washington State’s insurance regulations requiring fair claims handling, or could depend on the insurer’s violation of industry standards, or general unfairness.

However, IFCA has two big caveats.

First, IFCA doesn’t apply to health insurance carriers. That’s unfortunate because health insurance is under-regulated and prone to abuse, and health insurance policyholders are uniquely vulnerable to insurer misconduct because the rules are so complex and the stakes often very high. Health insurers are, however, subject to the patient bill of rights.

Second, the policyholder must send the insurance company a notice of the company’s IFCA violations before filing suit, and must send a copy to Washington’s Office of the Insurance Commissioner.

Third, IFCA does not apply to most employer-sponsored insurance, which is often exclusively governed by a federal law called ERISA.

IFCA violations can be complex, so it’s important to consult a lawyer to be sure you know your rights.