The Good Faith, Bad Faith, and Ugly Duties of UIM Insurers
Washington’s ever-expanding tort of bad faith requires insurers to deal fairly with their insureds, or face serious consequences including obligations beyond policy limits, and non-economic damages. Miller v. Kenny, 180 Wash. App. 772, 802, 325 P.3d 278 (2014). At first glance, the duty appears straightforward, but in application the duty to give “equal consideration in all matters to the insured's interests” is a complicated mire strewn with pitfalls. See Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 386 (1986). This is especially true in the context of underinsured motorist (UIM) claims where the insurer is pitted against its insured, litigating “in the shoes” of the underinsured tortfeasor. Ellwein v. Hartford Accident & Indem. Co., 142 Wn.2d 766, 780, 15 P.3d 640 (2001) (overruled on other grounds by Smith v. Safeco Ins. Co., 150 Wn.2d 478, 78 P.3d 1274 (2003)). The difficulty insurers face with conforming to the nearly indiscernible standard is best illustrated by a case from Division I, Leahy v. State Farm Mut. Auto. Ins. Co., 3 Wa. App. 2d, 613, 418 P.3d 175 (2018), where the court reversed summary judgment dismissal of a bad faith claim against a UIM insurer. The insured asserted bad faith even though the insurer had relied on a medical expert’s opinion in denying coverage for an unusual condition. Under this holding, an insurer may commit bad faith by relying on the opinion of a neutral medical expert in assessing the validity of a bodily injury claim. This ruling, discussed further below, is the product of the difficulty of applying bad faith concepts in the UIM context. Underinsured motorist coverage is a product of contract and statute because Washington’s UIM statute requires insurers to offer UIM coverage. RCW 48.22.030. The purpose of the statute and coverage is to allow an injured party to recover those damages which would have been received had the tortious party maintained liability insurance. Britton v. Safeco Ins. Co. of Am., 104 Wn.2d 518, 522, 707 P.2d 125 (1985). The injured insured’s UIM coverage provides “rights against his own insurance company co-extensive with those he would have had against the uninsured tortfeasor.” Sayan v. United Servs. Auto. Ass'n, 43 Wn. App. 148, 158, 716 P.2d 895 (1986).
“Accordingly, the UIM insurer is allowed to assert liability defenses available to the tortfeasor so that the insured is not placed in a better position as a result of being struck by an uninsured motorist as opposed to an insured motorist.” Petersen-Gonzales v. Garcia, 120 Wn. App. 624, 633, 86 P.3d 210 (2004). “[T]he relationship between a UIM insurer and its insured is adversarial.” Id. “UIM coverage requires that a UIM insurer be free to be adversarial within the confines of the normal rules of procedure and ethics.” Id. (quoting Ellwein v. Hartford, 142 Wn.2d at 780). “Because the provision of UIM coverage is by nature adversarial, an inevitable conflict exists between the UIM carrier and the UIM insured.” Barry v. USAA, 98 Wn. App. 199, 205, 989 P.2d 1172, 1176 (1999)
Despite the inevitable conflict that arises in the UIM context, an insurer must still be wary of its ongoing duties to its insured. Although “Tank’s ‘enhanced obligation’ rule is simply unworkable in the UIM context,” the duty of good faith does not simply disappear after a UIM claim is made. Ellwein, 142 Wa. 2d at 780. “[T]he duty of good faith and fair dealing survives within the UIM relationship” and an insured has a “reasonable expectation that he will be dealt with fairly and in good faith by his insurer.” Id. This “friction” between the adversarial relationship and the traditional fiduciary relationship is “difficult to resolve.” Barry, 98, Wn. App. at 205.
Savvy UIM plaintiffs attempt to leverage the lingering good faith duty, equating it to the enhanced duty from Tank. These efforts include allegations of bad faith by a UIM insurer because it intervenes in the action against the tortfeasor, requests examinations, submits discovery requests, or simply fails to pay the amount demanded by the UIM insured. Washington case law does not generally support these threats. Under Leahy, however, these arguments are not frivolous and insurers should tread carefully.
Savvy UIM plaintiffs attempt to leverage the lingering good faith duty, equating it to the enhanced duty from Tank. These efforts include allegations of bad faith by a UIM insurer because it intervenes in the action against the tortfeasor, requests examinations, submits discovery requests, or simply fails to pay the amount demanded by the UIM insured. Washington case law does not generally support these threats. Under Leahy, however, these arguments are not frivolous and insurers should tread carefully.
In its decision, the court reviewed the duty of good faith an insurer owes its insured, but quoted extensively from cases that did not involve UIM claims.
The Leahy case, likely wrongly decided, will plague insurers for years to come. In that case, Leahy’s car was struck from behind, causing soft tissue injuries to her neck and back. The at-fault driver’s $25,000 liability policy was split between three injured parties and Leahy received chiropractic, massage, and acupuncture services for her injuries. More than a year after the accident, Leahy sought UIM benefits for additional injuries, specifically a recent diagnosis of dermatomyositis (DM) that the auto accident allegedly caused by “lighting up” of her previously dormant DM. DM is an autoimmune disease that causes muscle inflammation, fatigue, and rashes. Leahy sought $287,900, which exceeded her $25,000 personal injury protection (PIP) and $100,000 UIM coverage with her insurer. Leahy’s insurer offered to waive $1,615 in PIP subrogation rights, asserting it did not have enough information to conclude the DM was caused by the accident.
Leahy sent her insurer a report by a rheumatologist who had examined Leahy and concluded that the DM was caused by the accident. The insurer responded by hiring an expert of its own to review the report. The insurer’s expert concluded that the DM was not caused by the accident and that there is no medical support for a causal relationship between trauma from a car accident and DM. The insurer made a new offer of $11,116.11 waiver of PIP. Leahy rejected the offer and sued.
A jury found in favor of Leahy and awarded her $884,017.31 in damages. Leahy then amended her complaint to add claims for bad faith, violation of the Consumer Protection Act (CPA), and violation of the Insurance Fair Conduct Act (IFCA). The trial court granted summary judgment dismissal of these new claims and Leahy appealed. The Court of Appeals reversed.
In its decision, the court reviewed the duty of good faith an insurer owes its insured, but quoted extensively from cases that did not involve UIM claims. It reasoned that an “insured’s denial of coverage, without reasonable justification, constitutes bad faith.” Leahy, at 631. The court framed the issue of bad faith by asking “whether there is a genuine issue of material fact whether the insurer acted reasonably in relying solely on its expert on causation, while ignoring Leahy’s expert on causation.” Id. at 633. Under this statement of the law, an insurer must act reasonably not merely have a “reasonable justification” for its actions. As shown by Leahy, the two standards are entirely different.
It is clear the insurer in Leahy had a reasonable justification to deny coverage because the denial was based on the opinion of a medical expert. Pruitt v. Alaska Pac. Assur. Co., 28 Wn. App. 802, 805, 626 P.2d 528 (1981) (“Alaska Pacific's total reliance on the single estimate of its experienced adjuster, Mr. Klinefelter, was reasonable and did not constitute bad faith.”). Notably, the insurer argued this to the court and pointed out that, as a UIM insurer, “it had no duty to ‘indiscriminately accept Leahy’s assertions about the causation of her DM,’ but instead only had to have a ‘reasonable basis’ for its actions.” Leahy, at 638. Surprisingly, the court found this “a remarkable position to take in dealing with an insured who has purchased UIM insurance.” Id. The court reiterated that UIM insurance “carries with it the duty to deal in good faith with its insured . . . [and] the insurer [has a] duty to deal with its insured in a proper manner.” Id.
The court, however, found there was a question of fact as to whether the insurer acted reasonably because there “was a clear conflict between two experts on a central question: causation.” Leahy, at 633. Under Leahy, an insured has a prima facie claim for bad faith if the insurer refuses to pay a UIM insured the amount demanded, so long as the insured has some evidentiary support for its claim. This is clearly an unworkable standard and at-odds with the adversarial posture of UIM claims.
Lock v. American Family Insurance Company is a more recent case from Division I that provides a more balanced approach to bad faith in the UIM context. 12 Wn. App. 2d 905, 460 P.3d 683. In Lock, the plaintiff/insured (Lock) sued her insurance company (American Family) and sought coverage under her UIM policy, also alleging non-contractual claims, including bad faith. Lock partly based her bad faith claim on untimely motions for summary judgment filed during the action, an improper attempt to remove the case to federal court, and a pretrial offer of settlement in the form of a check sent directly to the insured (not her attorney) with a letter indicating the check was “a draft in the amount of $4153.75 made payable to you. Said draft represents full and final settlement of all claims in the above-captioned matter.” Lock, at 913. The jury awarded Lock $21,000 for her UIM claim and awarded $413,575 on the bad faith claim. Lock, at 916.
The trial court granted American Family’s request for a JNOV on the bad faith claim. On appeal, Division I found the trial court correctly excluded most evidence of bad faith arising after the filing of the UIM lawsuit. “The trial court did not abuse its discretion in excluding the post litigation conduct of trial counsel, including evidence of bad faith in the filing of untimely motions for summary judgment and removing the case to federal court.” Lock, at 923. The court reasoned that “[w]ith the filing of the UIM litigation, the nature of the relationship between Lock and American Family became adversarial.” Lock, at 922. “Post litigation conduct of the insurer’s counsel is not the basis for liability for insurance bad faith.” Lock, at 923. Nevertheless, the court reversed the JNOV and remanded for trial of the bad faith claim based on the offer sent directly to Lock. “American Family’s corporate counsel directly communicated with Lock by mailing a check that purported to “represent full and final settlement of all claims” . . . [and] [t]his conduct was outside the ‘normal rules of procedure and ethics’ and outside an insured’s reasonable expectation of good faith conduct.” Lock, at 924. The court specifically found this letter violated both IFCA and the Rules of Professional Conduct. Id.
Lock distinguishes between litigation practices that may seem underhanded and conduct by an insurer that violates the normal rules of procedure and ethics. American Family’s attempt to remove the case to federal court, for which it was sanctioned by the federal court, was not a legitimate basis for a bad faith claim in a UIM case where the relationship is already adversarial. An offer to settle the UIM claim that violated IFCA and the RPCs, however, was sufficient to bring a bad faith claim.
Although Leahy appears to be the most extreme application of bad faith obligations to a UIM insurer, Lock makes it clear that these cases are difficult to predict and require careful navigation. This issue is far from resolved and is only likely to gain more attention as plaintiffs increasingly use bad faith claims to leverage UIM insurers.