Bad-faith claim can exist against liability insurer even absent coverage

By Stefanie L. Peppard

A policyholder has a right to sue its liability insurer for violation of the Consumer Protection Act even if the insurer has no duty to defend or indemnify, the Washington Supreme Court recently held.

In St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., no. 80359-5 (Nov. 26, 2008), Onvia sold a service that provided businesses with notices of opportunities to bid for government contracts. St. Paul provided liability insurance to Onvia. In February 2005, Responsive Management Systems (RMS) sued Onvia in a class action, alleging that Onvia had engaged in “fax blasting,” the mass faxing of junk advertisements, in violation of state and federal laws.

In February 2005, Onvia’s insurance broker allegedly tendered the defense of RMS’s lawsuit to St. Paul. St. Paul later denied receiving the February 2005 tender. The complaint was re-submitted to St. Paul in August 2005, and after RMS amended its complaint, St. Paul received the amended complaint also. In a November 2005 letter and in oral discussions in March 2006, St. Paul refused to defend or indemnify Onvia. Beginning in February 2005, Onvia defended itself. In April 2006, Onvia and RMS settled. They stipulated to certification of the proposed class and to a judgment of more than $17.5 million. Onvia assigned to RMS all rights of action that Onvia had against St. Paul. RMS covenanted to execute the judgment only against St. Paul, and not against Onvia’s own assets. In November 2006, the King County Superior Court found the settlement to be reasonable.
In the meantime, in July 2006, St. Paul brought a declaratory-judgment action against RMS in federal court and alleged that it had no duty to defend, settle, or indemnify the RMS suit against Onvia. RMS counterclaimed for violation of the contractual duties to defend, indemnify, and settle, for bad faith, and for “procedural bad faith” and violation of the Consumer Protection Act (CPA). The parties filed cross-motions for summary judgment. The federal district court granted St. Paul’s motion, holding that it had no duty to defend, settle, or indemnify RMS’s action and did not commit bad faith in refusing to defend Onvia.