Deadlines in Policy Fine Print Can’t Cut off IFCA Rights Says Court of Appeals

Washington’s Insurance Fair Conduct Act (IFCA) protects policyholders from insurers’ unreasonable refusal to pay covered losses or provide insurance policy benefits. Unfortunately, many insurers include fine print in the insurance policy contract that supposedly provides the policyholder cannot sue the insurer once certain time period has passed since the loss. These time periods are typically much, much shorter than statutes of limitations, and are often as short as one year.

Insurers often claim this language lets them off the hook for violating policyholders’ rights under IFCA or other laws once enough time has passed. This is particularly problematic because insurers often drag out disputed insurance claims for as long as possible. Accepting these insurers’ arguments would allow insurers to immunize themselves from suit by simply stalling until the deadline runs.

Can they do that?

Fortunately for Washington State policyholders, our Court of Appeals recently said “no way.” On January 13, 2020, the Court of Appeals decided West Beach Condominium v. Commonwealth Insurance Company of America, ruling that the deadline in the insurer’s fine print could not bar the policyholder from pursuing IFCA and similar consumer protection claims.

West Beach, a West Seattle condo owners’ association, had insurance coverage for the condo complex through Commonwealth Insurance. West Beach found substantial water damage in the condo complex and made an insurance claim with Commonwealth on September 26, 2016.

In March of 2017, Commonwealth denied coverage. Commonwealth claimed that the water damage had been happening for the past ten years. Commonwealth’s insurance policy contained fine print requiring West Beach to sue within a year after the loss, i.e., within a year after the initial water damage.

West Beach sued, alleging that Commonwealth breached the insurance policy contract. West Beach also sued under IFCA and Washington’s Consumer Protection ACT (CPA). The lower court dismissed the entire lawsuit because the claimed damage occurred more than one year before West Beach filed suit.

The Court of Appeals reversed and ordered that the lower court should not have dismissed the IFCA and CPA claims. Commonwealth claimed on appeal that by failing to file suit by the contractual deadline, West Beach gave up its right to any insurance coverage. Therefore, Commonwealth argued, West Beach had no right to bring IFCA or CPA claims because it had given up its insurance coverage.

The Court of Appeals determined the suit limitation clause only prevented West Beach from filing a very specific type of claim for breach of the insurance policy contract. But, the court ruled, Commonwealth could not use the contractual deadline to immunize itself from suit under IFCA and the CPA. These statutes give policyholders rights that do not go away merely because the policyholder missed a deadline buried in the insurance policy.

The West Beach decision is important because it preserves policyholders’ rights under Washington’s consumer protection statutes. These laws exist to protect Washington policyholders from sharp practices. Allowing insurers to exempt themselves from these laws simply by adding arbitrary deadlines to their insurance policy fine print would allow insurers to circumvent these protections by using the very type of sharp practice these laws exist to prevent.

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.

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.

The Moral High Ground Is Crucial In Insurance Disputes, Confirms Ninth Circuit

In any lawsuit, but particularly an insurance dispute, it’s important to have the “moral high ground.”  In an insurance case, this means cooperating with the insurer and responding to the insurer’s reasonable requests for information.  Even where the insured is in the right, insurers often seize on the insured’s failure to provide information about their claim or otherwise cooperate in the insurer’s investigation to justify denying coverage or payments.  Even where the insurer is acting unreasonably, failing to cooperate with the insurer gives the insurer a pretext to justify its conduct.

This was emphasized in the Ninth Circuit Court of Appeals’ recent decision in Birdgham-Morrison v. National General Assurance Company.  Ms. Birdgham-Morrison sued her insurer National General for failing to pay the full amount needed to cover her injuries sustained in a car crash under her Underinsured Motorist (“UIM”) coverage.

Ms. Birdgham-Morrison’s problem was the insurer was able to leverage her failure to provide the insurer more information about her injuries to justify refusing to pay the full amount of her claim.  The court noted the insured’s lawyer sent letters to National General demanding it pay the claim, but did not include specific information about her injuries.   Similarly, the court noted the plaintiff never responded to the insurer’s requests for additional information about her injuries.

Accordingly, the court ruled that National General did not violate Washington’s Insurance Fair Conduct Act in denying the full amount of Ms. Birdgham-Morrison’s claim.

This case illustrates the unfortunate reality that insureds must be able to show they went above and beyond in assisting the insurer with investigating their claim if they want to get the full policy coverage they paid for.

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[.]”

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.