Kirk v. Mt. Airy Ins. Co.

• Decision Date: 26 February 1998
• Docket Number: No. 65563-4,65563-4
• Citation: 951 P.2d 1124,134 Wn.2d 558
• Court: Washington Supreme Court
• Parties: Monica KIRK, a single woman, and Edith Sorensen, a widow, both as assignees of Nelson L. Christensen, Plaintiffs, v. MT. AIRY INSURANCE COMPANY, a foreign insurance corporation, Defendant.

Page 558

134 Wn.2d 558

951 P.2d 1124

Monica KIRK, a single woman, and Edith Sorensen, a widow,

both as assignees of Nelson L. Christensen, Plaintiffs, v. MT. AIRY INSURANCE COMPANY, a foreign insurance corporation,

Defendant.

No. 65563-4.

Supreme Court of Washington,

En Banc.

Argued Sept. 23, 1997.

Decided Feb. 26, 1998.

Robert B. Gould, Law Offices of Robert B. Gould, Brian Waid, Seattle, for Plaintiffs

Bryan Harnetiaux, Debra Stephens, Spokane, Amicus Curiae on behalf of Washington State Trial Lawyers Association.

Jerret Sale, Bullivant, Houser, Bailey, Pendergrass & Hoffman, Seattle, for Defendant.

William Hickman, Seattle, Amicus Curiae on behalf of State Farm Insurance Company, Et Al JOHNSON, Justice.

The United States District Court, pursuant to RCW 2.60, certified the following question to this court:

Does the holding in Safeco Ins. v. Butler, 118 Wash.2d 383, 823 P.2d 499 (1992), apply under a policy of professional liability insurance if the insurer fails to provide a defense to the insured in bad faith? If Butler applies, what remedies are available to the insured against the insurer? [ ¹

The starting point of our analysis requires us to assume bad faith has been established. The tort of bad faith has been recognized by this court. Safeco Ins. Co. of Am. v. Butler, 118 Wash.2d 383, 393-94, 823 P.2d 499 (1992). This cause of action acknowledges that the business of insurance affects the public interest and that an insurer has a duty to act in good faith. RCW 48.01.030. ² The tort of bad faith recognizes that traditional contract damages do not provide an adequate remedy for a bad faith breach of contract because an insurance contract is typically an agreement to pay money, and recovery of damages is limited to the amount due under the contract plus interest. 15A Ronald A. Anderson, Couch on Insurance § 56:10, at 17 (2d ed. 1983). In order to establish bad faith, an insured is required to show the breach was unreasonable, frivolous, or unfounded. Wolf v. League Gen. Ins. Co., 85 Wash.App. 113, 122, 931 P.2d 184 (1997). Bad faith will not be found where a denial of coverage or a failure to provide a defense is based upon a reasonable interpretation of the insurance policy. Transcontinental Ins. Co. v. Washington Pub. Utils. Dists.' Util. Sys., 111 Wash.2d 452, 470, 760 P.2d 337 (1988). The failure to defend without this requisite showing does

not constitute bad faith, trigger a presumption of harm, or allow coverage by estoppel.

I

The duty to defend arises whenever a lawsuit is filed against the insured alleging facts and circumstances arguably covered by the policy. 7C John A. Appleman, Insurance Law and Practice § 4681, at 16 (Walter F. Berdel rev. ed.1979). The duty to defend is "one of the main benefits of the insurance contract." Butler, 118 Wash.2d at 392, 823 P.2d 499. Although an insurer has a broad duty to defend, alleged claims which are clearly not covered by the policy relieve the insurer of its duty. State Farm Gen. Ins. Co. v. Emerson, 102 Wash.2d 477, 486, 687 P.2d 1139 (1984). "The key consideration in determining whether the duty to defend has been invoked is whether the allegation, if proven true, would render [the insurer] liable to pay out on the policy. It is not the other way around." Farmers Ins. Co. v. Romas, 88 Wash.App. 801, 808, 947 P.2d 754 (1997). The certified question requires us to assume the claim against the insured alleges facts giving rise to the insurer's duty to defend, and the duty was breached.

The general rule regarding damages for an insurer's breach of contract is that the insured must be put in as good a position as he or she would have been had the contract not been breached. Greer v. Northwestern Nat'l Ins. Co., 109 Wash.2d 191, 202-03, 743 P.2d 1244 (1987). In the failure to defend context, recoverable damages include: (1) the amount of expenses, including reasonable attorney fees the insured incurred defending the underlying action, and (2) the amount of the judgment entered against the insured. Greer, 109 Wash.2d at 202, 743 P.2d 1244. In Greer, we stated an insurance company that wrongfully refuses to defend an insured's claim is liable for the amount of the judgment entered provided the act creating liability is a covered event and provided the amount of the judgment is within the limits of the policy. Greer, 109 Wash.2d at 202-03, 743 P.2d 1244. However, Greer does not resolve the question before us because Greer

did not address damages and liability when the insurer refuses to defend in bad faith.

II

The existence of bad faith removes us from the general rule. The certified question does not ask us to resolve a simple breach of contract; rather, we are confronted with the intentional abuse of a fiduciary relationship. The bad faith requires us to set aside traditional rules regarding harm and contract damages because insurance contracts are different. In Butler, under the reservation of rights context, we held there is a rebuttable presumption of harm for an insurer's bad faith breach of contract. Butler, 118 Wash.2d at 389-90, 823 P.2d 499. We are asked whether the rule established in Butler applies to the question before us here.

Although a showing of harm is an essential element of an action for bad faith handling of an insurance claim, we imposed a rebuttable presumption of harm once the insured meets the burden of establishing bad faith. Butler, 118 Wash.2d at 389-90, 823 P.2d 499. In Butler, the court broadly stated, "we presume prejudice in any case in which the insurer acted in bad faith." Butler, 118 Wash.2d at 391, 823 P.2d 499. The certified question requires us to assume the insurer acted in bad faith; therefore, we must assume harm.

The rebuttable presumption of harm recognized in Butler stems from the insurer's duty to act in good faith, which was extensively discussed in Tank v. State Farm Fire & Cas. Co., 105 Wash.2d 381, 715 P.2d 1133 (1986). In Tank, we stated the duty of good faith requires fair dealing and equal consideration for all matters related to the insured's interests. Tank, 105 Wash.2d at 386, 715 P.2d 1133. In Tank, we noted a reservation of rights defense provides a valuable service to an insured, but also recognized the potential for abuse if the defense was undertaken in bad faith. Tank, 105 Wash.2d at 390-91, 715 P.2d 1133. While Tank firmly established an insurer's heightened obligation to act in good faith, Tank did not address a remedy because we found no breach of this duty.

The presumption of harm recognized in Butler is merely

                an application of the principle discussed in Tank.  The rebuttable presumption of harm applies to the question before us because a bad faith breach of the duty to defend wrongfully deprives the insured of a valuable benefit of the insurance contract, and leaves the insured faced with the difficult problem of proving harm.  Without the rebuttable presumption of harm, the insurer could defend its position under the following contract theory--even if there were a duty to defend, our bad faith breach did not cause injury to the insured because ultimate liability was found to be outside the scope of coverage.  While the insurer is liable for attorney fees for the breach of the duty to defend under this contract theory, the insured is still confronted with the difficult task of establishing either:  (1) that coverage under the policy would have been available, or (2) that liability against the insured would not have been found if the insured had defended the claim in good faith.  The rebuttable presumption of harm must be applied because an insured should not be required to prove what might have happened had the insurer not breached its duty to defend in bad faith;  that obligation rightfully belongs to the insurer who caused the breach.  Butler, 118 Wash.2d at 390, 823 P.2d 499.   The disadvantage we sought to prevent in Butler applies equally in this case. 3
                

III

Where an insurer acts in bad faith in failing to defend, Butler and other Washington cases recognize that coverage by estoppel is one appropriate remedy. Butler, 118 Wash.2d at 393, 823 P.2d 499. The amicus curiae suggest that Butler, and its remedy of coverage by estoppel, was wrongly decided. Amicus argue if a jury or a court find that liability rests outside the scope of coverage, any bad faith on the part of the insurer did not cause harm, and the insurer cannot be 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. The insurer who in bad faith refuses to acknowledge its broad duty to defend is no less liable than the insurer who accepts the duty to defend under a reservation of rights, but then performs the duty in bad faith.

                found liable.  This argument misses the point.  The insured and the insurer contracted for insurance.  One of the benefits to this insurance contract is that the insurer will provide a defense when a claim arises alleging facts that may be covered by the contract.  In this case the insurer breached the contract by failing to provide a defense in bad faith.   The insured did not receive the benefit of the bargain, and we assume the [951 P.2d 1128] insured was harmed by the bad faith breach.  We feel it is appropriate to estop the insurer from arguing a coverage defense when the insurer breached the contract in bad faith.  In such a situation any claim that should have been defended, but was not, will create liability for the insurer to pay at least policy limits
                

When dealing with an insurance contract, we cannot focus solely on the contractual aspect of the relationship, and we must take into account the purpose of creating a bad faith cause of action. Butler, 118 Wash.2d at 393-94, 823 P.2d 499. The duty to defend is broader than the duty to indemnify, so the duty to defend may be triggered without exposing the insurer to coverage liability. Safeco...