Tank v. State Farm Fire & Cas. Co.

• Citation: 105 Wn.2d 381,715 P.2d 1133
• Decision Date: 20 March 1986
• Docket Number: Nos. 50933-6,50994-8,s. 50933-6
• Court: United States State Supreme Court of Washington
• Parties: , 54 USLW 2502 James D. TANK, Respondent, v. STATE FARM FIRE & CASUALTY COMPANY, a Washington corporation, Petitioner. Pamela G. JOHNSON, Appellant, v. PUBLIC EMPLOYEES MUTUAL INSURANCE COMPANY (PEMCO), a Washington corporation, Respondent. En Banc

Page 381

105 Wn.2d 381

715 P.2d 1133, 54 USLW 2502

James D. TANK, Respondent, v. STATE FARM FIRE & CASUALTY COMPANY, a Washington

corporation, Petitioner.

Pamela G. JOHNSON, Appellant, v. PUBLIC EMPLOYEES MUTUAL INSURANCE COMPANY (PEMCO), a

Washington corporation, Respondent.

Nos. 50933-6, 50994-8.

Supreme Court of Washington,

En Banc.

March 20, 1986.

Mullin, Etter & Cronin, P.S., Timothy Cronin, Spokane, Reed, McClure, Moceri, Thonn & Moriarty, William Hickman, Karen Southworth Weaver, Seattle, for petitioner.

Clinton Henderson, Clarkston, for respondents Tank and Walker.

Bryan Harnetiaux, Spokane, amicus curiae for respondent Tank.

Gould, Russo, Eitreim & Barrett, Robert B. Gould, Douglas K. Barrett, Seattle, for appellant.

Keolker & Swerk, Robert A. Keolker, Seattle, for respondent Public Employees Mutual Insurance Co.

BRACHTENBACH, Justice.

These two cases were consolidated. Both present the issue whether a third party claimant may sue an insurer directly for breach of the insurer's duty of good faith. To fully address that question, the portion of Tank v. State Farm Fire & Casualty Company which involves Walker, the third party claimant, is consolidated with Johnson v. Public Employees Mutual Insurance Company and analyzed in part II.

That portion of Tank v. State Farm Fire & Casualty Company which involves an insured's claims against his insurer for breach of duty of good faith is addressed in part I.

I

The case involving Tank presents the question, broadly stated, of the nature of an insurance company's duty of good faith toward its insured when the company defends under a reservation of rights, and whether State Farm Fire & Casualty Company (State Farm) breached that duty. We hold that the duty of good faith of an insurance company defending under a reservation of rights includes an enhanced obligation of fairness toward its insured. Potential conflicts between the interests of insurer and insured, inherent in a reservation-of-rights defense, underlie this enhanced obligation. In this case, however, there is insufficient evidence on the record to support the finding that a question of fact exists regarding whether State Farm breached its duty of good faith. Thus, we affirm the trial court grant of summary judgment to State Farm and reverse the Court of Appeals. See Tank v. State Farm Fire & Cas. Co., 38 Wash.App. 438, 686 P.2d 1127 (1984).

The incident giving rise to this dispute occurred in April 1980, when Tank assaulted Walker in a supermarket parking lot in Clarkston, Washington. Walker sued Tank, alleging intentional tort. When Tank contacted State Farm, his insurer, the company advised Tank that if his acts were intentional, there was a specific policy provision excluding coverage.

Tank then retained his own attorney, who tendered to State Farm the defense of the Walker suit. After investigation of the incident, State Farm accepted the defense upon a specific, clearly stated reservation of the right to contest coverage. State Farm then retained counsel to represent the insurer's interests and retained separate counsel to represent Tank.

The attorney hired by State Farm for Tank maintained contact with the insured, the insured's personal attorney, and the insurer, providing a written evaluation of the case to all parties prior to trial. Defense counsel's opinion was that it was a case of liability, that mutual combat was not a defense, and that self-defense was a slim but possible defense. Counsel also informed all parties that settlement in the $3,000 to $5,000 range had been rejected by Tank's personal lawyer. Although it is not entirely clear from the record, the insured apparently was financially unable to contribute to a settlement. It is also unclear whether State Farm would have contributed estimated defense costs to a settlement. In any event, no settlement was reached, and the case was tried to the court.

The court found Tank liable to Walker for $16,118.67 in damages and $305.40 in costs. This judgment was based on a finding that Tank had committed an intentional tort. Tank has not contested this finding. Moreover, he concedes that the finding that he committed an intentional tort absolves State Farm of any duty to pay.

State Farm refused to pay the judgment. Tank then sued State Farm for breach of duty of good faith. His complaint alleged that State Farm failed to make reasonable efforts to settle the Walker claim and that State Farm subordinated Tank's interests to its own interests by structuring a defense which would absolve State Farm of liability under Tank's insurance policy. State Farm moved for summary judgment of dismissal, which the trial court granted. Tank appealed to the Court of Appeals, which reversed as to Tank. State Farm now petitions for review of that reversal.

The real issue in this case is: what does an insurer's duty of good faith entail when the insurer defends under a reservation of rights? In addressing this issue, we focus on (1) the evolution of the duty of good faith imposed on insurers in this state, (2) the nature of this duty in a reservation-of-rights context, and (3) application of the good faith duty in a reservation-of-rights context to the facts of this case.

Webster's Third New International Dictionary 978 (1976) defines "good faith" as "a state of mind indicating honesty and lawfulness of purpose". This definition of good faith as applied to the insurance industry would require that an insurer deal with its insured in a state of mind indicating honesty and lawfulness of purpose.

The duty to act in good faith or liability for acting in bad faith generally refers to the same obligation. Tyler v. Grange Ins. Ass'n, 3 Wash.App. 167, 173, 473 P.2d 193 (1970). Indeed, we have used those terms interchangeably. See Murray v. Mossman, 56 Wash.2d 909, 355 P.2d 985 (1960). However, regardless of whether a good faith duty in the realm of insurance is cast in the affirmative or the negative, the source of the duty is the same. That source is the fiduciary relationship existing between the insurer and insured. Such a relationship exists not only as a result of the contract between insurer and insured, but because of the high stakes involved for both parties to an insurance contract and the elevated level of trust underlying insureds' dependence on their insurers. This fiduciary relationship, as the basis of an insurer's duty of good faith, implies more than the "honesty and lawfulness of purpose" which comprises a standard definition of good faith. It implies "a broad obligation of fair dealing", Tyler, at 173, and a responsibility to give "equal consideration" to the insured's interests. Tyler, at 177. Thus, an insurance company's duty of good faith rises to an even higher level than that of honesty and lawfulness of purpose toward its policyholders: an insurer must deal fairly with an insured, giving equal consideration in all matters to the insured's interests.

The duty of good faith has been imposed on the insurance industry in this state by a long line of judicial decisions. See, e.g., Burnham v. Commercial Cas. Ins. Co., 10 Wash.2d 624, 117 P.2d 644 (1941); Evans v. Continental Cas. Co., 40 Wash.2d 614, 245 P.2d 470 (1952); Van Dyke v. White, 55 Wash.2d 601, 349 P.2d 430 (1960); Murray v. Mossman, 56 Wash.2d 909, 355 P.2d 985 (1960); Waite v. Aetna Cas. & Sur. Co., 77 Wash.2d 850, 467 P.2d 847 (1970); Hamilton v. State Farm Ins. Co., 83 Wash.2d 787, 523 P.2d 193 (1974); Levy v. North Am. Co. for Life & Health Ins., 90 Wash.2d 846, 586 P.2d 845 (1978); Tyler v. Grange Ins. Ass'n, 3 Wash.App. 167, 473 P.2d 193 (1970); Weber v. Biddle, 4 Wash.App. 519, 483 P.2d 155 (1971); Briscoe v. Travelers Indem. Co., 18 Wash.App. 662, 571 P.2d 226 (1977); Rice v. Life Ins. Co., 25 Wash.App. 479, 609 P.2d 1387 (1980); Gould v. Mutual Life Ins. Co., 37 Wash.App. 756, 683 P.2d 207 (1984).

Not only have the courts imposed on insurers a duty of good faith, the Legislature has imposed it as well. RCW 48.01.030 provides, in relevant part:

The 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.

In addition, the Insurance Commissioner, pursuant to legislative authority under RCW 48.30.010, has promulgated regulations defining specific acts and practices which constitute a breach of an insurer's duty of good faith. See Washington Administrative Code 284-30-300 et seq.

The imposition of an insurer's duty of good faith by both the courts and the Legislature of this state has resulted in lawsuits alleging breach of that duty in both nondefense and defense settings. In a nondefense context, allegations of breach have arisen from the company's wrongful refusal to pay a claim. ( See, e.g., Levy v. North Am. Co. for Life & Health Ins., supra; Rice v. Life Ins. Co., supra; Gould v. Mutual Life Ins. Co., supra.) In a defense context, actions for breach of an insurer's duty of good faith have involved a wrongful refusal to defend (see, e.g., Waite v. Aetna Cas. & Sur. Co., supra; Briscoe v. Travelers Indem. Co., supra ), or failure to settle a lawsuit within policy limits (see, e.g., Burnham v. Commercial Cas. Ins. Co., supra; Evans v. Continental Cas. Co., supra; Murray v. Mossman, supra; Hamilton v. State Farm Ins. Co., supra; Tyler v. Grange Ins. Ass'n, supra ). While the above "defense context" opinions all dealt with a nonreservation-of-rights defense, at least two decisions have addressed breach of duty of good faith in the conduct of a reservation-of-rights defense: Van Dyke v. White, supra and Weber v. Biddle, supra. Both Van Dyke and Weber made it clear that an insurer owes the same duty of good faith to its insured, regardless of the type of defense it has undertaken. The Court of Appeals in Weber, 4 Wash. at 524, 483 P.2d 155, specifically found no distinction between the two types of defenses:

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