Coventry Associates v. American States Ins. Co.

• Citation: 136 Wn.2d 269,961 P.2d 933
• Decision Date: 03 September 1998
• Docket Number: No. 65850-1,65850-1
• Court: United States State Supreme Court of Washington
• Parties: COVENTRY ASSOCIATES, Petitioner, v. AMERICAN STATES INSURANCE COMPANY, Respondent.

Page 269

136 Wn.2d 269

961 P.2d 933

COVENTRY ASSOCIATES, Petitioner, v. AMERICAN STATES INSURANCE COMPANY, Respondent.

No. 65850-1.

Supreme Court of Washington En Banc.

Argued June 17, 1998.

Decided Sept. 3, 1998.

Law Offices of Mark Alan Johnson, Inc., Mark A. Johnson, Scott A. Samuelson, Seattle, for Petitioner

Bullivant, Houser, Bailey, Pendergrass & Hoffman, Robert F. Riede, Jerret E. Sale, Deborah L. Carstens, Seattle, for Respondent.

Reed, McClure, William R. Hickman, Pamela A. Okano, Seattle, Amicus Curiae on Behalf of Mutual of Enumclaw Insurance United Services Auto Association & State Farm Fire & Casualty Company.

Lane, Powell, Spears & Lubersky, David M. Schoeggl, Linda B. Clapham, Tammy L. Lewis, Seattle, Amicus Curiae on Behalf of London Market Insurers.

JOHNSON, Justice.

The main issue presented in this appeal is whether an insured may bring a bad faith or Consumer Protection Act (CPA) claim against its insurer when the insurer conducted a bad faith investigation of the insured's claim but the denial of coverage was ultimately determined to be correct. American States Insurance Company (American States) denied Coventry Associates' (Coventry) claim after a mud slide damaged an apartment complex Coventry was constructing in Renton, Washington. Coventry filed suit against American States, alleging breach of contract, bad faith, and CPA violations. The trial court granted American States' motion for partial summary judgment on the coverage issue and dismissed Coventry's remaining

claims. Coventry appealed to the Court of Appeals, which affirmed. Coventry Assocs. v. American States Ins. Co., 86 Wash.App. 845, 939 P.2d 1245 (1997). We granted Coventry's petition for review and reverse and remand the case for trial.

FACTS

In 1990, Coventry was constructing an apartment complex in Renton, Washington; the construction project was located on the side of a hill. Coventry built a retaining wall to stabilize the hillside during construction but unusually heavy rainfall in the area caused mud to slide into the retaining wall. The retaining wall collapsed and mud and water flowed into the main construction site, damaging the property. Coventry ceased work on the project.

Coventry submitted a claim to American States, its insurer on the construction project. An 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 loss coverage.

Coventry filed suit against American States alleging breach of the insurance contract, bad faith, and CPA violations. The parties agreed the damage was not solely to the retaining wall, the project was seriously damaged by the mud slide, and weather was the proximate cause of the damage. American States argued the loss was not covered because Coventry's policy contained a contingent "weather The trial court granted American States' motion for summary judgment on the breach of contract claim. It also granted American States' motion to dismiss the remaining bad faith and CPA claims, concluding those claims could not exist in the absence of coverage. The Court of Appeals affirmed and, as noted above, we granted Coventry's petition for review, which raised the following issues:

conditions" exclusion precluding coverage from damage resulting from a landslide caused by rainfall.

(1) Does Washington provide a bad faith or CPA cause of action to first party insureds?

(2) If an insurer acts in bad faith, is there a presumption of harm?

(3) What are the remedies available to an insured if its insurer has acted in bad faith?

ANALYSIS

American States asserts that "Coventry concedes that the loss is not subject to coverage under the American States policy." Resp't Answer to Pet. for Review at 5. Coventry does not dispute this assertion nor does it raise the issue of coverage in its briefing to this court. For purposes of review, American States concedes it "acted in bad faith" in investigating Coventry's claim. However, American States contends its bad faith is not actionable, as a matter of law, because "the policy issued to Coventry did not provide coverage for the loss." Resp't Answer to Pet. for Review at 10. Essentially, American States argues because its denial of Coventry's claim ultimately proved to be correct, Coventry was not harmed as a result of American States' bad faith investigation of Coventry's claim.

Coventry argues an insured suffers harm from a bad faith investigation of its claim regardless of whether the denial of coverage eventually turns out to be appropriate. Coventry asserts it suffered harm because a portion of its premium went for the security of fair claims' administration that American States did not provide. Coventry further Insurance companies must conduct their relations with their insureds in good faith. RCW 48.01.030 states, "[t]he business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters." ¹ Washington Administrative Code (WAC) 284-30 covers unfair claims settlement and trade practices by insurance companies. The purpose of WAC 284-30 is, in part, to "define certain minimum standards which, if violated with such frequency as to indicate a general business practice, will be deemed to constitute unfair claims settlement practices." WAC 284-30-300. As the Court of Appeals noted, the unfair practices listed in WAC 284-30 include misrepresenting pertinent facts and refusing to pay without a reasonable investigation (WAC 284-30-330), failure to disclose all relevant policy provisions (WAC 284-30-350), and failure to state the specific grounds for denial of a claim (WAC 284-30-380). Coventry Assocs., 86 Wash.App. at 848-49, 939 P.2d 1245.

argues insureds are generally harmed when there is no deterrent to insurers who handle a claim in a bad faith manner but ultimately prevail on the coverage issue.

As noted above, American States concedes, for purposes of this appeal, that it acted in bad faith in investigating Coventry's claim. As an element of every bad faith or CPA action, however, an insured must establish it was harmed by the insurer's bad faith acts. Safeco Ins. Co. of Am. v. Butler, 118 Wash.2d 383, 389, 823 P.2d 499 (1992) ("a showing of harm is an essential element of an action for bad faith handling of an insurance claim"); Industrial Indem. Co. v. Kallevig, 114 Wash.2d 907, 920, 792 P.2d 520, 7 A.L.R.5th 1014 (1990) (in CPA actions, plaintiff must show, among other factors, an unfair or deceptive act or practice The Court of Appeals agreed with American States and determined Coventry was unable to establish harm, even though the denial of Coventry's claim may have been "procedurally deficient." Coventry Assocs., 86 Wash.App. at 851, 939 P.2d 1245. According to the Court of Appeals, "mere procedural errors in handling a specific claim do not support an action for bad faith because the errors do not harm the insured...." Coventry Assocs., 86 Wash.App. at 850, 939 P.2d 1245. American States agrees and asserts that in the absence of coverage, a first party insured may not have a cause of action for bad faith.

which "causes injury to the party in his business or property").

Issue # 1--Does a First Party Insured Have a Cause of Action

for Bad Faith Investigation in Washington?

This issue is one of first impression in the context of a first party action. In the context of a third party reservation of rights case, once an insured meets the burden of establishing an insurer's bad faith, a rebuttable presumption of harm arises. Safeco Ins. v. Butler, 118 Wash.2d at 390, 823 P.2d 499. See also Kirk v. Mount Airy Ins. Co., 134 Wash.2d 558, 564, 951 P.2d 1124 (1998) ("Once the insurer breaches an important benefit of the insurance contract, harm is assumed, the insurer is estopped from denying coverage, and the insurer is liable for the judgment.").

In this case, the Court of Appeals did not discuss Kirk and held that Safeco Ins. does not "authorize bad faith or Consumer Protection Act claims in the absence of coverage." Coventry Assocs., 86 Wash.App. at 850, 939 P.2d 1245. In distinguishing Safeco Ins., the Court of Appeals concluded that "harm is rebuttably presumed in that narrow circumstance where the insurer's promise to defend would entitle the insured to coverage under promissory estoppel if the insured proves bad faith." Coventry Assocs., 86 Wash.App. at 850, 939 P.2d 1245. American States agrees and argues that Safeco Ins. and Kirk have no application to first party claims because "[t]he rationale for Coventry argues our decisions in Safeco Ins. and Kirk control this case. Coventry asserts that the same policy underpinnings of Safeco Ins. and Kirk, upon which this court based its rebuttable presumption of harm analysis, apply here. Coventry also argues an insurer's duties to an insured are not limited to the payment of a covered claim. Coventry states: "Insurance consumers pay for and are entitled to the security that their insurers will investigate fairly and honestly. Failure to recognize a cause of action in the instant circumstances will encourage insurers to litigate, not investigate, significant property damage claims." Pet. for Review at 11-12.

                imposing the presumption of harm in the context of third-party coverage does not arise in a

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