Insurers face greater bad-faith liability under new statute

By Jeffrey P. Downer

Bad-faith claims against insurers are greatly liberalized under a new statute in Washington that becomes effective July 22, 2007.

On May 15, 2007, Washington Gov. Christine Gregoire signed Engrossed Substitute Senate Bill (ESSB) 5726 into law. The new statute, titled the “Insurance Fair Conduct Act,” changes Washington insurance law in several important ways.

First, ESSB 5726 makes it easier for an insured to prove bad faith. The bill creates a statutory cause of action for actual damages and reasonable attorney fees and litigation costs for a “first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer[.]” This test of “reasonableness” is a much lower threshold for proving insurer bad faith than many Washington cases traditionally had required. Historically, several reported Washington decisions required an insured to prove a “frivolous and unfounded denial of benefits” by the insurer as a prerequisite to bad-faith liability.

Second, ESSB 5726 permits the superior court to award punitive damages in “an amount not to exceed three times the actual damages.” Although insurers previously could be liable for treble damages under Washington’s Consumer Protection Act, those additional damages were capped at $10,000. The new statute has no such limit. This represents a major departure from Washington courts’ strong public policy against punitive damages, which they have followed since 1891.