Insurers face greater bad-faith liability under new statute

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Third, ESSB 5726 impliedly permits a finding of bad faith even if there is no coverage. The statute includes in its definition of “unfair or deceptive acts or practices in the conduct of the business of insurance” certain regulations promulgated by the Washington Insurance Commissioner. Those regulations, including Washington Administrative Code § 284-30-330, provide that insurers violate their duties when “failing to acknowledge and act reasonable promptly upon communications”; “refusing to pay claims without conducting a reasonable investigation”; “failing to affirm or deny coverage of claims within a reasonable time”; “delaying the investigation of claims by requiring the insured to submit a preliminary claim report and then requiring subsequent submissions which contain substantially the same information”; and “failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.”

All of these regulations pertain to how an insurer responds to a coverage claim rather than whether coverage actually exists in the first place. The implication of ESSB 5726 therefore is that a violation of an insurer’s duty of full and timely response to a coverage claim can trigger a violation of the new statute. So it is conceivable that an insured who suffered only nominal damages could recover substantial attorney fees for an insurer’s dilatory but correct denial of coverage, on the basis that it was too slow to communicate the coverage denial.

The statute contains an exception from its provisions. Health-insurance plans are exempt from ESSB 5726.

ESSB 5726 is likely to face major challenges by insurers in court. The low level of conduct that an insured must show to render an insurer liable could be enough to trigger liability for treble damages. This is perhaps the lowest level of conduct anywhere in the nation that a claimant need prove to recover punitive damages. Insurers will litigate whether such punitive damages are constitutional. Although states have discretion to levy punitive damages, the Eighth Amendment to the United States Constitution imposes limits on that discretion, which prohibits excessive fines and cruel and unusual punishments.
Insurers and insureds also probably will fight out in court whether ESSB 5726 will apply retroactively.