Insured's fault precludes PIP reimbursement out of UIM award

By Kenneth E. Hepworth

A personal-injury-protection (PIP) insurer may not obtain an offset of its PIP payments from an underinsured-motorists arbitration award where the insured is partly at fault, the Washington Supreme Court has held in a unanimous decision.

In Sherry v. Financial Indem. Co., no. 78667-4 (June 7, 2007), Financial Indemnity Company (FIC) insured Kevin Sherry for both PIP and UIM benefits. An underinsured motorist’s car hit Sherry while he was a pedestrian. FIC contended that the accident was a stunt that was reminiscent of the “Jackass” TV and movie series. The UIM coverage provided for arbitration of Sherry’s UIM claim. An arbitrator found $53,127.92 in medical bills and $90,000 in general damages but also concluded that Sherry could have simply stepped out of the way of the oncoming car. He found Sherry to be 70 percent at fault and entered a UIM award was for $42,938.38, or 30 percent of his total damages.

Under FIC’s no-fault PIP coverage, the insurer had paid $10,000 in medical bills and $4,600 in wage loss. When judgment on the arbitration award was being entered, FIC asked the trial court to reduce the UIM award in the full amount of the PIP payments. FIC’s policy, like most PIP policies, permits reimbursement of PIP payments once the insured is fully compensated. The trial court agreed and, after awarding costs and fees, entered judgment for Sherry of only $34,792.

Sherry appealed the PIP reimbursement. The Court of Appeals reversed, holding that FIC could seek PIP reimbursement only after the insured is fully compensated for his loss. The Court of Appeals held that because Sherry did not receive the 70 percent of his damages that the arbitrator had found, he did not receive full compensation, and FIC was not entitled to any offset in reimbursement of its PIP payments.

FIC successfully petitioned the Washington Supreme Court for review. The Supreme Court affirmed the Court of Appeals’ decision and denied FIC any reimbursement of its PIP. Justice Tom Chambers wrote for the unanimous Court, “Adopting the approach urged by FIC would result in a very narrow view of what damages must be recovered before duplication occurs, and one that is not consistent with the general policy that insureds receive full compensation before an insurer can seek reimbursement.” Full compensation, he added, means that the insured has recovered all damages that he suffered in the accident, no matter whose fault caused them, including the insured’s own fault.

“An insurer is entitled to reduce an UIM arbitration award by previously paid PIP benefits only when its insureds are fully compensated for their actual damages, without reduction to account for the insureds’ fault,” the Court concluded.

The Court also considered whether the trial court was authorized to pass on the PIP-reimbursement issue. The Court concluded that under Washington’s statute governing arbitrations, a judge does not have authority to resolve coverage disputes when entering an judgment on an arbitration award. Here, however, the parties requested that the judge decide this issue, so that they effectively had amended their pleadings to include a request for declaratory relief. Accordingly, it was appropriate for the trial court to decide the PIP-reimbursement issue.

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.

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.

Same firm, same expertise, new name

By Joel Wright

We are happy to announce that we have shortened our firm’s name, from Lee, Smart, Cook, Martin & Patterson, P.S., Inc. to Lee Smart, P.S., Inc. For many years, people have referred to us simply as Lee Smart, and now it’s official.

Our name change coincides with the departure of attorneys Mike Patterson, Pat Buchanan, Duncan Fobes, and eight other attorneys. They will continue defending public entities and church-liability cases at a new firm. We value the many years that they have been our friends and colleagues, and we wish them the very best in their new venture.

With more than 30 trial lawyers, Lee Smart remains the largest firm in the state of Washington that devotes its practice almost exclusively to litigation. We pride ourselves on our expertise in efficient resolution of litigation and, unlike the “litigation departments” of larger firms, on our depth of experience in actually trying cases in the courtroom.

Lee Smart continues its aggressive defense of a wide range of civil litigation, including complex commercial litigation; construction-defect claims and construction-site accidents; professional-liability claims against doctors, physical therapists, allied health professionals, lawyers, real estate brokers, and other professionals; personal-injury actions; and claims against public entities.

Around The Firm

Ketia B. Wick and Michael A. Guadagno won summary judgment of dismissal in York v. Helpenstell, a medical-malpractice case. Plaintiff alleged damages arising from a knee surgery that the defendants performed in 2002. Prior to the expiration of the three-year statute of limitations, the plaintiff filed suit, alleging lack of informed consent. After the statute had expired, the court dismissed the claim for lack of informed consent but allowed the plaintiff to amend his complaint to add a claim for professional negligence. Ketia and Mike moved to dismiss the new claim, arguing that it violated the statute of limitations. Additionally, Ketia and Mike argued that the new claim did not “relate back” to the original complaint, because the claim for professional negligence focused on the medical procedure itself, while the claim for lack of informed consent focused on the conduct prior to the procedure. The court agreed with Ketia and Mike and dismissed the plaintiff’s claims against their clients.

Christina L. Smith won judgment on the pleadings in Hunt v. Windermere Real Estate of Yelm, a real-estate malpractice case. After buying residential property, plaintiff discovered that defects to the sewer system were more significant than the sellers originally had disclosed to him. On summary judgment, Christina argued that the real estate agent had no duty to discover undisclosed defects in the sewer system and had disclosed all information that the agent possessed on the subject. She also argued that the negligence claims were barred by the economic-loss rule under a new Washington Supreme Court case, Alejandre v. Bull, 159 Wn.2d 674, 153 P.3d 864 (2007). The court agreed and dismissed all claims against Christina’s clients. … Michelle A. Corsi and William R. Kiendl won summary judgment in Borish v. Russell, an appraiser-malpractice action. Plaintiffs bought a house in Gig Harbor and claimed that several parties, including the appraiser, misrepresented the nature and quality of construction. The court agreed with Michelle and Bill that Alejandre defeated plaintiffs’ damage claims under the economic-loss rule. … In Cook v. Apple Park Apartments, Michelle Corsi and Jennifer Lauren won partial summary judgment in a personal-injury lawsuit brought by a tenant against her landlord. Plaintiff claimed that she was exposed to mold while residing in her apartment. On summary judgment, the judge dismissed all claims for negligence and for violation of the Consumer Protection Act and the Residential Landlord-Tenant Act (RLTA). The court agreed with Michelle and Jennifer that there was insufficient medical evidence of those claims. Plaintiff’s sole remaining claim, for breach of contract, is the subject of another pending summary judgment motion.

Jeffrey P. Downer and Keith J. Kuhn negotiated a favorable settlement in Saulque v. Belfor USA, a personal-injury action arising from a construction-site accident. Plaintiff was a laborer for a scaffolding subcontractor. He fell 21 feet from a scaffolding platform that he was dismantling, broke several bones, and suffered permanent disabilities. He received more than $83,000 in worker’s-compensation benefits. Plaintiff sued the general contractor and several subcontractors for failing to provide a safe place to work. All of the subcontractors successfully moved for dismissal because they had no involvement in or liability for the accident. After deposing plaintiff and establishing that plaintiff himself had caused the accident through inattention and had violated both the subcontractor's and the general contractor’s safety standards, Jeff and Keith moved for summary judgment in favor of the general contractor. The motion was pending when the parties held a court-ordered mediation. Despite plaintiff’s opening settlement demand of $425,000, Jeff and Keith settled the claim for just $30,000, which was barely a third of the worker’s-compensation lien.