Coventry -- A Sword for First Party
Coventry decision was published by the Washington State
Supreme Court in 1998. It resolves important
issues about first party bad faith claims in Washington.
This paper was presented to a WSTLA seminar about PIP
Associates v. American States Insurance Company, 136
Wn.2d 269, 961 P.2d 933 (1998), our Supreme Court
clarified several issues which have troubled bad faith
litigators. These include the relationship of the
Washington Consumer Protection Act and common law bad
faith, whether bad faith can exist independent of
coverage, and what remedies are available in a first
party bad faith case. The heart of the opinion, however,
addresses fundamental aspects of first party coverage.
For the first time in many years, the Court has
redefined the relationship between insured and insurer
in first party claims.
does not directly address PIP issues, but draws no
distinctions between first party property and medical
coverages. It provides no reason to distinguish or limit
its holding to property claims.
from a landslide. The insured was constructing an
apartment complex in Renton. Heavy rains caused a
mudslide to damage a retaining wall. After a brief
investigation, American States denied coverage. The
Court described the insurerís investigation:
American States adjuster briefly investigated the
project site, determined the damage was to the
retaining wall, and denied the claim because
Coventry's policy had an exclusion for damage to that
structure. The adjuster did not investigate the cause
of the damage or any loss of business coverage because
he did not believe that Coventry had a claim for
business loss. The adjuster did not investigate damage
to the construction project other than that to the
retaining wall. The adjuster admitted he looked only
at two of the six forms comprising Coventry's policy
before he denied coverage. The adjuster later
testified he never considered whether Coventry had a
business loss claim even though it had some business
American States Ins. Co.,
136 Wn.2d 269, 274, 961 P.2d 933 (1998). American States
won a summary judgment of no coverage. The Court of
Appeals affirmed. Coventry Assoc. v. Am. States Ins.
Co., 86 Wn. App. 845, 939 P.2d 1245 (1997).
of the appeal, Coventry admitted that the policy did not
cover the loss, and American States conceded it acted in
bad faith in investigating the claim. Id., at 136
Wn.2d 275. Absent coverage, argued the insurer, what
duty was owed to Coventry?
Johnson framed the issue as whether a first party
insured has a cause of action for bad faith
investigation in Washington. Id., at 277. The
Court answered in the affirmative:
We hold an
insured may maintain an action against its insurer
for bad faith investigation of the insured's claim and
violation of the CPA regardless of whether the insurer
was ultimately correct in determining coverage did not
exist. An insurer's duty of good faith is separate
from its duty to indemnify if coverage exists. This
result creates no insurmountable burden on the
insurer. The insurer is only required to fulfill its
contractual and statutory obligation to fully and
fairly investigate the claim. The problem arises when
the insurer fails to investigate, in bad faith,
thereby placing the insured in the difficult position
of having to perform its insurer's statutory and
at 279. Put another way, if the insurer fails to conduct
a good faith investigation, it is liable for the
insuredís expenses in conducting an investigation.
Whether the claim eventually turns out to be covered is
irrelevant Ė the carrierís duty to investigate in
good faith is independent of coverage.
How does Coventry
influence PIP adjustments? Typically, we see no
significant investigation in PIP claims at all. The PIP
adjuster goes through the following steps:
Acknowledges claim and sends out PIP application.
Receives bills and claims for wages and services.
early medical expenses. Delay wage claim.
treatment (especially chiropractic) exceeds some
level, demands an examination. Often advises the
insured that the adjuster will be "guided"
by the result of the examination.
6. Pays or
denies further treatment based on the examination
results. May even
deny pending bills for past treatment.
"good faith" investigation, then, amounts to
reviewing medical records and obtaining an examination.
The PIP adjuster never seems to consult with the
insured, or with the insuredís providers. The adjuster
does absolutely nothing to investigate beyond accepting
the examinerís opinion and ignoring all others. Is
this a good faith investigation? Does the insured
be found in claim manuals. Many insurers set out
guidelines for handling difficult claims, and the
guidelines are seldom followed. Typically, they instruct
the adjuster to meet with the insured in person, to help
evaluate the injury and the impact it has on the
insured. State Farmís claim guide suggests that the
adjuster meet in person with a provider to
discuss the treatment and ask questions. When have we
seen an adjuster do that?
adjusting practice simply fails to rise to the level
required by Coventry. Our Supreme Court sees an
insurerís first party claim investigation as a process
which benefits both the insured and the insurer Ė an
evenhanded, fair, balanced investigation.
insurerís duty to investigate arises, says the Court,
not from any adversarial role between the parties, but
from the fiduciary relationship between insured and
insurer. Insureds pay for and deserve good faith
treatment and fair investigation. The Court pointed out
in a footnote:
Arizona Supreme Court noted in Rawlings v. Apodaca,
151 Ariz. 149, 726 P.2d 565 (1986), the insurance
industry itself lends credence to the fact the
insureds seek more than a bare promise to pay certain
claims. "Advertising programs portraying
customers as being 'in good hands' or dealing with a
'good neighbor' emphasize a special type of
relationship between the insured and the insurer, one
in which trust, confidence and peace of mind have some
part." Rawlings, 151 Ariz. at 155 n.3.
at 283, fn. 5. Given that underpinning, and the rule
that the insurer must give the insuredís interest
equal consideration to its own, Tyler v. Grange,
3 Wn. App. 167, 173, 177, 473 P.2d 193 (1970), how
should claims investigation impact the claims decision?
A hypothetical follows.
A is the insuredís treater. She knows her patient
well, having seen him twice a week for four months.
Progress is slow, but steady. Chiropractor A sees a need
for further treatment. Chiropractor B was hired by the
insurer to conduct an examination. After an interview
and an exam which took less than an hour, Chiropractor B
says no further treatment is necessary. The adjuster has
not investigated beyond the paper file, having never
laid eyes on any of the people involved. Further
treatment is denied. Has the carrier committed bad
the first question is whether the insured has received
the benefit of a good faith investigation. The second
question is whether the adjuster gave equal
consideration to the insuredís interest, both in
planning the investigation and in making the claim
decision. The answers to both are obvious. If you see
the insurer-insured relationship as one of trust and
service, rather than as hostile adversity, it becomes
clear that the modern PIP claim is nearly always handled
in bad faith.
professionals will say that the "independent"
physician conducted part of the investigation for the
insurer. At deposition, however, the carrierís
examiner will admit no knowledge of the policy, the
claims process, or the Fair Claims Practices Regulations
(WAC 284-30). Is it good faith for the carrier to
delegate the investigation to a physician or
chiropractor? If the carrier obtains an exam, must it
search for a truly objective examiner? The Court in Coventry
sees an insurerís investigation as something the
insured has purchased with premium dollars. Since
investigation is a benefit to the insured, it must be
accomplished with the insuredís welfare in mind:
insurer fails to adequately investigate an insured's
claim, the insured must either perform its own
investigation to determine if coverage should have
been provided or take no action at all. In either
situation, the insured does not receive the full
benefit due under its insurance contract.
accustomed to the adversary system, and all its
trappings. Coventry says first party claims
should be handled in good faith, and good faith means
fair, balanced and without adversariness. The most basic
claims decisions wonít bear close scrutiny. Why did
the insurer pick Chiropractor B for the exam? Is he
fair? Has he often sided with the insurer? Laying aside
the adversary method of resolving claims opens a world
of opportunity for the insured.
Harm to the
insured is an essential element of either a bad faith
claim or CPA violation. In Coventry, the insured
argued for coverage by estoppel or a partial return of
premium. The Court, however, focused on the actual harm
suffered by the insured:
establishes that Coventry incurred certain expenses
as a result of American States' bad faith
investigation. For example, Coventry hired
geotechnical and civil engineers to review the facts
and circumstances surrounding the incident causing
damage to the construction site. Coventry also hired
insurance experts to determine if coverage was denied
in bad faith. To the extent Coventry can establish it
incurred expenses as a direct result of American
States' breach of contract and bad faith actions, it
American States Ins. Co.,
136 Wn.2d 269, 283, 961 P.2d 933 (1998). The Court was
also unwilling to presume harm, leaving the burden of
proof with the insured. Using tort analysis, the Court
Coventry is not entitled to coverage by estoppel
or a return of a portion of its premium but that its
damages are limited to the amounts it has incurred as
a result of the bad faith investigation, as well as
general tort damages. The record before us establishes
that Coventry was required to go through some
financial expense as a result of the bad faith
investigation conducted by American States. These
expenses include the cost of hiring their own experts
and investigators to determine if American States
should have covered the claim. To that extent,
Coventry is entitled to make a claim for those amounts
and damages normally associated with bad faith and CPA
violations. Coventry must, like every other plaintiff,
establish those damages at trial.
at 285. The mention of "general tort damages"
is important, as it resolves an issue never directly
addressed in prior cases. Note that Fisons, which
doesnít allow general damages in CPA cases, is not
overruled. See Washington
State Physicians Ins. Exch. & Ass'n v. Fisons Corp.,
122 Wn.2d 299, 329, 858 P.2d 1054 (1993).
A few days
after Coventry was decided, the Court of Appeals
decided State Farm Fire and Casualty v. Kiniry, #39212-3-I
(Slip Opinion, September 14, 1998). Although Kiniry
was a CPA case brought by an insurer, rather than an
insured, the Courtís comment on damages is helpful.
element of the CPA claim is whether Kiniry's false
reports and phony billing statements caused injury to
State Farm in its business or property. State Farm
incurred expenses for experts, interpreters,
transcribers, attorneys, and its own employees during
its investigation of Kiniry's reports and billing
statements. Thus, the evidence supports a verdict by a
preponderance of the evidence that Kiniry violated the
CPA by submitting either the false reports, the phony
billing statements, or both.
at 18. The mention of attorney fees is important.
Contrast the holdings in Sign_O_Lite Signs v.
DeLaurenti Florists, 64 Wn. App. 553, 825 P.2d 714
(1992), and St. Paul Ins. Co. v. Updegrave, 33 Wn.
App. 653, 656 P.2d 1130 (1983).
In a PIP
claim, then, the insured who suffers a bad faith
investigation is entitled to damages for the expenses
necessary to properly investigate and determine whether
medical expenses are covered by the policy. These should
include fees of experts, investigators, and attorneys
hired by the insured. The insured is entitled to an
award of general damages under the common law bad faith
count, as well as any other damages proximately caused
by the insurerís conduct.
close reading. It overflows with quotable morsels for
trial briefs, and answers questions which have plagued
bad faith litigators for years. The Supreme Court
understands the fiduciary nature of the insured/insurer