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06/13/2014

Washington’s Insurance Fair Conduct Act Only Applies to First-Party Claims

In the U.S. District Court for the Western District of Washington, Continental Casualty Co. moved to dismiss all counts of the plaintiffs’ complaint, including, but not limited to, the plaintiffs’ Insurance Fair Conduct Act (IFCA) and bad-faith claims. On May 16, Judge Marsha J. Pechman dismissed the plaintiffs’ IFCA claim, ruling in Cox v. Cont’l Cas. Co., 2014 U.S. Dist. LEXIS 68081, that IFCA does not apply to third-party liability claims. Pechman explained that only a “first party claimant to a policy of insurance” has a right of action under IFCA.

Cox arises out of a malpractice action against retired dentist Dr. Henri Duyzend. In the malpractice action, a group of Duyzend’s former patients secured a judgment totaling $35,212,000 against Duyzend for their malpractice claims. The judgment exceeded Duyzend’s professional liability policy with Continental, which had $5 million per claim and $8 million aggregate limits of liability. Thereafter, on an assignment of claims from Duyzend, the dental patients sued Continental, alleging in part that Continental acted in bad faith and violated IFCA by not pursing a global settlement with them and risking an excess judgment against Duyzend.

The plaintiffs alleged that from 2008 to 2012, Continental settled individual claims sequentially rather than pursuing a global settlement of all claims against Duyzend. They also alleged that Continental had numerous opportunities to pursue settlement of all claims against Duyzend. For example, the plaintiffs alleged that in 2008, Lawrence Longfelder, an attorney for most of the former patient claimants, suggested that Continental tender the policy limit in exchange for a release of all claims against Duyzend. The plaintiffs alleged that Continental failed to respond to Longfelder’s letter, and instead pursued settlement with the individual claimants, which resulted in the excess judgment.

With regard to the plaintiffs’ IFCA claim, Pechman explained that “[a]n IFCA claim arises when ‘any first party claimant’ to a policy of insurance … is unreasonably denied a claim for coverage or payment of benefits by an insurer.” Pechman noted that a third-party insurance policy ‘indemnif[ies] an insured for covered claims which others [third-party claimants] file against him.” The professional liability policy at issue in Cox was a third-party liability policy, not a first-party insurance policy. As a result, Duyzend was never a first-party claimant under IFCA and could not assign an IFCA claim to the plaintiffs. Therefore, Pechman dismissed the plaintiffs’ IFCA claim.

As to the plaintiffs’ bad-faith claim involving Continental’s alleged failure to settle within Duyzend’s policy limits, Continental argued that the plaintiffs had not adequately alleged that there was an opportunity for Continental to reach a global settlement. Pechman disagreed, explaining that “Washington recognizes that an insurer can incur liability ‘for a failure to adjust or compromise a claim within the limits of liability, if that failure is attributable to … bad faith.’ ” The court further noted that under Washington law, “the existence of an unmistakable ‘opportunity’ to settle all claims is not an explicit element of the tort of bad faith.” Pechman stated that Washington courts “have not yet given a clear answer to the question whether an insurer has an affirmative duty to initiate settlement negotiations in the absence of a within-limits offer by claimants,” but “the weight of the evidence … indicates Washington does not consider a within-limits offer a requirement.”

The judge held that “[c]laimants at minimum need to broach the topic of settlement.…” According to Pechman, “Continental’s demand that plaintiffs plausibly allege not only a ‘receptive climate for settlement’ but an … explicit promise of a release from liability has no apparent basis in Washington law.”

Insurance

Stephanie Maria Ries
Donald J. Verfurth



Insurance