By Bryan Graff
Two recent decisions by the U.S. District Court for the Western District of Washington have substantially circumscribed the effect of Washington’s Insurance Fair Conduct Act (“IFCA”), RCW 48.30.015. These two decisions hold that an IFCA claim cannot be maintained against a third-party liability insurance carrier. The holdings are difficult to square either with the text of IFCA, or its legislative history. The U.S. District Court has refused to certify the question to the Washington Supreme Court, but a reexamination of the issue by Washington’s appellate courts is needed and should be forthcoming.
IFCA was enacted in 2007 as Engrossed Substitute Senate Bill 5726 (“SB 5726”). A companion bill (House Bill 1491,
hereinafter “HB 1491”) was also introduced in Washington’s House of Representatives. As originally drafted, SB 5726 and HB 1491 would have authorized an action by “any insured or beneficiary to a policy of insurance” who is unreasonably denied a claim for coverage or payment of benefits. The original bills defined “insured” broadly to include “any direct or third-party beneficiary to a policy of insurance.”
The drafters included the “third-party beneficiary” language intending to bring within IFCA’s scope cases such as Gould v. Mutual Life Insurance Company, in which Division I of the Washington Court of Appeals held that a beneficiary (who was not a named insured) under a life insurance policy could assert a cause of action against an insurer under Washington’s Consumer Protection Act, ch. 19.86 RCW, for bad faith settlement practices. Numerous stakeholders and Washington’s Office of the Insurance Commissioner, however, expressed concerns about IFCA (as originally drafted) creating a broader third-party bad faith right of action, i.e., direct claims by tort victims against tortfeasors’ insurers. In particular, opponents cited to the experience in California between 1979 and 1988 during which time California allowed a third party to directly sue another’s insurer under the California Unfair Practices Act.
Based upon these concerns, and acknowledging that the legislation was not intended to create a third party (non-insured) right of action against insurers in Washington, the Legislature amended SB 5726 and limited an IFCA plaintiff to a “first party claimant.” The Legislature defined a first party claimant as “an individual, corporation, association, partnership, or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract,” making it consistent with WAC 284-30-320(6).
In Cox and Central Puget Sound Regional Transit Authority, the U.S. District Court, however, interpreted the term first party claimant as being limited to an insured under a first party insurance policy.
Washington defines first-party insurance as a policy that “pay[s] specified benefits directly to the insured
when a ‘determinable contingency’ occurs,” “allow[ing] an insured to make her own personal claim for
payment against her insurer.” An example is renter’s insurance. In contrast, a third-party insurance policy
“indemnif[ies] an insured for covered claims which others [third-party claimants] file against him.” The
professional liability policy [the insured] had with [his insurer] is a third-party policy. Thus, he was never a
“first party claimant” under the IFCA and could not assign an IFCA claim to Plaintiffs.
Cox, 2014 U.S. Dist. LEXIS 68081, at *15 (internal citations omitted).
By confusing first-party coverage with a first party claimant, the U.S. District Court has rendered IFCA’s reach far narrower than the Legislature intended when it amended SB 5726, created the right of action for a first party claimant, and defined the term. The Legislature’s concern was to clarify that IFCA was not intended to create a broad third-party bad faith claims allowing tort victims to sue their tortfeasors’ insurers directly. The Cox and Central Puget Sound Regional Transit Authority decisions, however, deny relief to first party claimants suing their own insurers under third party liability policies. The Legislature intended to protect such claimants when enacting IFCA. It is in the context of such policies that first party claimants quite often depend upon good faith claims handling, or are damaged by bad faith claims handling the most.
In Central Puget Sound Regional Transit Authority, the U.S. District Court sought to justify its holding based upon the statutory definition of first party claimant in RCW 48.30.015(4), writing that “the IFCA defines ‘first party claimant’ in a narrow way that applies only to first-party insurance.” The definition in RCW 48.30.015(4), however, nowhere mentions, or is limited to first party insurance and it is far from narrow. Rather, the statutory text provides any individual, corporation, or other legal entity that is a covered person under an insurance policy following the occurrence of a covered contingency or loss (or, in a duty to defend case, a conceivably covered loss)11 a right of action under IFCA if their insurer unreasonably denies their claim, or unreasonably denies them a payment of policy benefits.
First party claimants with claims arising under third party liability policies should continue asserting their rights under IFCA and urge examination of the issue by Washington’s appellate courts, or the U.S. Court of Appeals for the Ninth Circuit.
This message has been released by the Insurance Group at Ryan, Swanson & Cleveland, PLLC to advise of recent developments in the law. Because each situation is different, this information is intended for general information purposes only and is not intended to provide legal advice on any specific facts and circumstances. Ryan, Swanson & Cleveland, PLLC is a full-service law firm located in Seattle, Washington.