Court of Appeals Reiterates Insurer’s Obligation to Protect Policyholder From Lawsuit

When a driver crashes into another vehicle and is sued for damages, the driver’s insurer typically has an obligation to  defend the lawsuit and act in good faith to protect its insured’s interests.  When the insurer fails to do so, the driver likely has legal recourse under Washington law.

Washington’s Court of Appeals recently reiterated this principle in Singh v. Zurich American Insurance Company.  In Singh, the Court of Appeals ruled Singh’s insurer, Zurich American, was liable for failing to settle and defend claims against Singh in good faith.

On July 20, 2011, one of Singh’s employees, driving Singh’s semitruck, allegedly caused a 16-vehicle crash by failing to slow down for congested traffic.  Persons injured in the crash, and the families of those killed in the crash, sued Sing for damages.  Because of the dramatic injuries and deaths allegedly caused by Sing’s employee, the plaintiffs quickly advised Singh that they saw their damages recoverable from Singh as exceeding the limits of Sing’s insurance policy.  In other words, Singh knew that, if he lost the court case, he would have to pay significantly more money than his Zurich American insurance policy would cover.

Singh’s insurance policy with Zurich American obligated Zurich American to defend Singh in the lawsuit.  Zurich hired a lawyer to defend Singh.  Zurich’s lawyer recognized it was in Singh’s best interests to pay the entire insurance policy limit to settle the large monetary demands of the persons injured and killed in the crash.  But the attorney also recognized that disbursing the entire policy limit to the first plaintiffs to sue Singh would leave Singh without insurance coverage should later claimants seek damages from Singh.

Accordingly, Zurich’s lawyer proposed to reserve some of Singh’s policy limits to protect Singh from future claims arising from the crash.  However, Zurich ignored its lawyer’s advice and ordered the lawyer to settle the existing claims with the full policy limits.  Zurich’s lawyer did so.

Later, another person sued Sing claiming injuries in the crash.  Zurich refused to defend the lawsuit because Singh’s policy limits were exhausted from the prior settlement. Singh paid for his own counsel and ultimately paid $250,000.00 to settle the new claims.

Singh then filed suit against Zurich alleging Zurich acted in bad faith and violated Washington’s Insurance Fair Conduct Act (“IFCA”) and Consumer Protection Act (“CPA”).  The jury found in Singh’s favor, agreeing Zurich breached Singh’s insurance policy and acted in bad faith.

The Court of Appeals upheld the jury’s verdict.  The court observed the insurer’s duty to defend the insured “is one of the main benefits of the insurance contract.”  Thus, the court determined Zurich could not permissibly exhaust the policy limits then use its exhaustion of the policy limits as an excuse to continue defending Singh.  Doing so put Zurich’s interests over Singh’s in violation of the insurance policy and Washington law.  Notably, Zurich ignored its own lawyer’s suggestion it keep some policy limits in reserve to protect Singh from future claims.

Washington Federal Court Rejects Insurer Efforts to Escape Lawsuit by Paying Benefits Retroactively

One important right policyholders have is to be fully compensated or “made whole” when the insurer improperly denies coverage or payment of benefits.  Some insurers argue, incorrectly, that they can avoid making the policyholder whole by paying the disputed policy benefit after the policyholder files a lawsuit.  That’s incorrect because by the time the policyholder files suit, they’ve typically lost significantly more than just the disputed policy benefit: they’ve hired lawyers or experts, paid for repairs or other bills out of pocket, or lost business income because they couldn’t afford to effect repairs without insurance coverage.

In its April 23, 2018 decision in Williams v. Foremost Insurance Co., 2:17-CV-1113-RSM, 2018 WL 1907523 (W.D. Wash. Apr. 23, 2018), the U.S. District Court for the Western District of Washington analyzed and rejected the argument that the insurer can escape a bad faith lawsuit by retroactively paying the benefits it denied in the first instance.

Williams brought a claim for vandalism damage under her insurance policy with Foremost.  Foremost denied Williams’ claim for insurance benefits, arguing that the vandalism was caused by people who were Williams’ tenants at the time of the damage.  Foremost ignored Williams’ argument the loss was covered because the vandals were former as opposed to current tenants.

Williams brought a lawsuit alleging claims for bad faith and violations of Washington’s Insurance Fair Conduct Act (“IFCA”) and Consumer Protection Act (“CPA”); those claims entitled Williams to damages beyond the amount of the disputed insurance benefit, such as attorney’s fees, court costs and treble damages.

The court promptly ruled that coverage existed and ordered Foremost to pay the disputed benefits.  Following that ruling, Foremost paid Williams $187,001.43 in benefits owed.

Foremost then asked the court to dismiss Williams’ claims for bad faith and for CPA and IFCA violations.  Foremost claimed that, since it paid the policy benefits Williams claimed, Williams had no right to assert any additional claims.  The Court rejected Foremost’s arguments.

First, and most importantly, the court rejected Foremost’s argument that Williams’ remaining claims were barred because Foremost ultimately paid the insurance benefits, and that Williams could not bring further claims without producing “her complete financial records.”  The court determined “Foremost’s insurance payment to Ms. Williams is irrelevant to the issue of bad faith” and that “Washington State law does not appear to provide that retroactive payment for an insurance claim extinguishes all the alleged harm to a plaintiff[.]”

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Snow lake trail, Central Cascades.

Next, the Court rejected Foremost’s argument that its claim denial was reasonable in light of the evidence Foremost had at the time.  The Court noted that Foremost’s evidence showed only that the vandalism was caused by former – not current – tenants, and that Foremost had no evidence that the vandals were Williams’ tenants at the time the vandalism occurred.  Moreover, Williams explicitly advised Foremost the vandals were not tenants at the time of the damage.

Finally, the Court also emphasized that an insurer’s bad faith denial of coverage injures the insured beyond merely the dollar amount of the policy benefit.  In this case, Williams suffered additional damages because Foremost’s wrongful denial delayed her ability to repair the vandalism damage to her building; Williams also had to hire an expert, take construction loans, and perform some repairs herself.

The Williams decision emphasizes insurers cannot escape bad faith lawsuits merely by paying the disputed benefits after the fact.