In a decision policy holders will appreciate, the Washington Supreme Court recently held the insured could pursue bad faith claims for delay in processing the claim even when there is no coverage under the policy. See St. Paul Fire and Marine Ins. Co. v. Onvia, Inc., 2008 Wash. LEXIS 1055 (Wash. Nov. 26, 2008).
The case came to the Court on certified questions from the U.S. District Court, Western District of Washington. St. Paul did not act in bad faith in refusing to defend, settle, or indemnify against a third-party liability claim because there was no coverage under the policy. But the issue was whether the insured could pursue common law bad faith and claims under the Consumer Protection Act based on St. Paul's delay in handling the claim.
The insured tendered the suit to St. Paul. It took nine months for St. Paul to deny coverage and a defense. The insured settled the underlying suit, which included assigning its rights to sue St. Paul. The suit for declaratory relief alleged St. Paul violated a number of insurance claims-handling regulations in bad faith, including failing to timely acknowledge and act upon the notice of the claim and tender of defense, and by failing to promptly or reasonably investigate the claim.
The Court decided St. Paul had acted in bad faith even though there was no coverage under its policy. Under Washington law (similar to Hawai`i law), every insurer had a duty to act promptly, in both communication and investigation, in response to a claim or tender of defense. Therefore, a third party insured had a cause of action for bad faith claims handling that was not dependent on the duty to indemnify, settle, or defend. However, the insured could not take advantage of the remedy of coverage by estoppel with the harm presumed. Instead, the insured had to prove actual harm and "damages were limited to the amounts incurred as a result of the bad faith . . . as well as general tort damages."
The Court also held that the insured could bring suit under the Consumer Protection Act even though there was no duty to settle, indemnify, or defend. But again, the remedy would be limited to the statutory remedies available to any successful claimant under the Consumer Protection Act.
Under Hawaii law, a claim for the tort of bad faith does not turn on whether the claim for benefits are due, but instead turns on the conduct of the insurance company in handling the claim. See Honbo v. Hawaiian Ins. & Guar. Co., 86 Hawai`i 373, 382, 949 P.2d 213, 221 (Haw. Ct. App. 1997)(relying on The Best Place, Inc. v. Penn Am. Ins. Co., 82 Hawai`i 120, 132-33, 920 P.2d 334, 346-47 (1996)). However, a claimant cannot pursue a bad faith claim based purely on a violation of the Hawai`i Insurance Code's Unfair Methods of Competition and Unfair and Deceptive Acts and Practices Chapter, as there is no private cause of action under the Code. Hough v. Pacific Ins. Co., 83 Hawai`i 457, 470, 927 P.2d 858, 871 (1996). Hough also held the employee could not maintain an action under Hawaii's Consumer Protection Act, Haw. Rev. Stat. 480-2, because he was the third-party beneficiary of his employer's workers' compensation policy, and therefore not a "consumer" under the statute. Hough, 83 Hawai`i at 470, 927 P.2d at 871. Nor could the employee maintain an action based on his third-party beneficiary status because his employer was also not a "consumer" as defined in Haw. Rev. Stat. 480-1. On the other hand, the workers' compensation statute did not preempt contract or tort actions against the insurer arising out of delays or denials of workers' compensation claims.
