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Insurer’s litigation conduct could violate duty of good faith

Litigation conduct by an underinsured-motorist insurer may be presented as evidence of bad faith when it falls outside the normal rules of procedure and ethics, the Court of Appeals held in Lock v. American Family Ins. Co., No. 79255-5-I (Apr. 6, 2020).

In that case, plaintiff was in a car accident with an underinsured motorist. Plaintiff tendered her claim to her auto insurer, seeking underinsured motorist (UIM) coverage. The insurer paid UIM benefits until medical evidence showed her treatment related to the accident was complete.

A year later, the insured sued her insurer, seeking coverage under the UIM policy and asserting extra-contractual claims including bad faith. The insurer removed the case to federal court, but the case was remanded.

On remand, the state court judge denied the insurer’s request to file a motion for summary judgment after the filing deadline. The insurer removed a second time, and filed its motion for summary judgment in federal court. Remanding again, the federal judge sanctioned the insurer for “cheap trial tactics,” requiring the insurer to pay the insured’s removal and remand expenses. The insurer’s corporate counsel mailed the sanctions check directly to the insured, instead of to her attorney as the ethics rules provide.

The state court judge again denied the insurer’s request to hear the untimely summary judgment motion, citing bad faith litigation conduct. The court excluded evidence of litigation conduct as evidence of bad faith. During trial, the sanctions check was admitted into evidence for another purpose, but the trial court ruled it could not be used as evidence of bad faith and barred the insured from presenting damages evidence.

The jury found for the insured on all claims, but the trial court granted the insurer’s post- trial motion, dismissing all extra-contractual claims and ruling the jury had impermissibly used the sanctions check to calculate bad faith damages, contrary to the court’s order.

The insured appealed the post-trial rulings. As to her bad faith claim, she contended the trial court erred by excluding evidence of the insurer’s litigation conduct.

The Court of Appeals recognized that bad faith litigation conduct is viewed differently than bad faith claims-handling conduct because litigation is adversarial by nature. Similarly, UIM litigation is distinct from other insurance litigation, as the UIM insurer stands in the shoes of an underinsured tortfeasor. A UIM insurer may defend a lawsuit as the underinsured tortfeasor would defend; it has the right to contest questionable claims and to defend itself against such claims. However, the adversarial nature of UIM litigation is still bounded by a reasonable expectation of good faith.

Therefore, allowing litigation conduct to serve as evidence of bad faith would undermine the ability of insurers, and their attorneys, to present a UIM case within the bounds permitted by law. Additionally, other remedies address improper litigation conduct: the insured can move to strike, compel discovery, secure protective orders, or impose sanctions.

In this case, the insurer’s claim-handling conduct ceased approximately a year before the insured filed her lawsuit. After that point, the relationship between the insured and her insurer turned adversarial, and litigation rules applied to the conduct of the insurer and its counsel. Therefore, the Court of Appeals affirmed the trial court’s decision to exclude evidence of counsel’s bad faith litigation conduct, the serial removals and the late-filed motion for summary judgment.

However, the Court of Appeals held that, while the trial court properly admitted the settlement check into evidence, it erred in excluding evidence of damages, including emotional distress that the insured may have experienced in response. The Court of Appeals remanded the matter for retrial of the insured’s claim for common law insurance bad faith based on the insurer’s conduct in directly contacting the insured pretrial.

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