fairnessIn a decision issued last week, the Washington Supreme Court narrowed the possible relief available to policyholders who are harmed by insurer misconduct, holding that a claim cannot be brought under the Insurance Fair Conduct Act based on claims handling, unless there has been an actual denial of coverage.

In 2007, Washington enacted the Insurance Fair Conduct Act (the “IFCA”) which gives insureds a statutory “bad faith” cause of action against insurers who unreasonably deny coverage. On its face, the IFCA broadly addresses unfair insurer practices. Since enactment, however, Washington courts have been split as to the scope of the law. Policyholders and insurers have hotly contested whether unfair claims-handling practices and regulatory violations are actionable under the IFCA, or whether the law requires an unreasonable denial of coverage. In its recent decision, Perez-Crisantos v. State Farm Fire & Casualty Co., the Washington Supreme Court answered the question in favor of insurers, holding that the IFCA creates a private cause of action only when an unreasonable denial of coverage has occurred.

Perez-Crisantos was rear-ended and injured by an underinsured motorist, resulting in over $50,000 in medical bills. He settled with the other motorist’s insurer, and his own insurer, State Farm, then compensated him up to the coverage limit of his personal insurance protection (PIP) insurance, but refused to pay benefits under underinsured motorist insurance (UIM) coverage. Perez-Crisantos claimed that State Farm had unreasonably denied his UIM claim, while State Farm claimed that it simply disagreed with the claim’s value.

Following arbitration in which State Farm was ordered to further compensate Perez-Crisantos for his medical treatment, Perez-Crisantos sued State Farm under the IFCA, arguing that State Farm had committed regulatory violations in forcing him to litigate to recover payments due to him. The lower court dismissed that claim on summary judgment, finding that the insurer’s lower assessment of the claim’s value did not amount to unreasonable denial of coverage sufficient to trigger IFCA liability. The Washington Supreme Court agreed to hear a direct appeal.

Subsection (1) of the IFCA states, “Any first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action in the superior court. . . .” RCW 48.30.015(1) (emphasis added). Subsection (5) lists various regulatory violations that trigger the award of triple damages and attorney fees under the statute. The Court characterized the relationship between these various sections of the law as “vexing,” and stated that “given that the trier of fact must find that the insurer acted unreasonably under subsection (1), and that such a finding mandates attorney fees under subsection (3) and gives the trial court discretion to award treble damages under subsection (2), it is not clear what a finding of a regulatory violation accomplishes.”

But after considering the statute as a whole and its purpose, the Court affirmed, determining that an unreasonable denial of coverage must occur for an insured to pursue a cause of action under the IFCA, and that a regulatory violation alone is not sufficient. The Court was quick to point out that many of the regulatory violations enumerated in subsection (5) of the IFCA would in and of themselves constitute unreasonable denial of coverage, and that most are likely actionable under other laws, such as the Consumer Protection Act. But the Court held that in the case of Perez-Crisantos, differing claim valuations and forcing an insured to litigate the value of the claim did not amount to an unreasonable denial.

Washington has historically favored policyholders when interpreting state law, and some have characterized this decision as bringing the state into line with the majority in the country. The IFCA is a somewhat unusual statute, however, and drawing parallels with other states’ laws is difficult. Attorneys who represent policyholders have already begun to voice concerns that the decision does not conform to the spirit of what may be simply a poorly written statute. Additionally, although the decision disallows an IFCA claim based on regulatory violations alone, it does not clearly define what an “unreasonable denial” looks like, except to say that it did not occur in this particular case. Many will be left wondering whether this decision opens the door for insurance companies to violate Washington’s regulations on claims handling, so long as some nominal amount of compensation is eventually paid.