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

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In response to RMS’s counterclaim that St. Paul had committed procedural bad faith and violated the CPA, St. Paul argued that in the absence of any duty to defend, it could not be liable for mere procedural mishandling of Onvia’s coverage claim. The federal court certified that question to the Washington Supreme Court.

The Supreme Court noted that Washington’s law of bad faith derives from statutory and regulatory provisions and from the common law. Washington’s insurance code recognizes that the business of insurance is affected by the public interest. The Washington Insurance Commissioner therefore promulgated regulations that govern the claims-handling process. Under Washington law, a single violation of those claims-handling regulations constitutes an unfair practice under the CPA. In a previous case, the Supreme Court had held that a first-party insurer therefore could commit bad faith and violate the CPA in mishandling its investigation of a claim even if it ultimately correctly denied the claim. Coventry Assocs. v. Am. States Ins. Co., 136 Wn.2d 269 (1998).

The St. Paul Court observed that the two main benefits of liability coverage are payment and defense. But the duty of good faith is not specific to either of those benefits; it permeates the insurance agreement. The Court held that “there is no appreciable difference between this case and Coventry with respect to whether bad faith claim mishandling remains actionable in the absence of coverage.” The same was true of RMS’s counterclaim under the CPA.

RMS nevertheless must prove damages. The St. Paul Court rejected its arguments that harm is presumed. RMS must prove actual harm, including the amounts it incurred as a result of the bad faith and any general tort damages.