In February the Supreme Court of Washington handed down its first major decision on the Insurance Fair Conduct Act (“IFCA”): Perez-Crisantos v. State Farm. The Court’s narrow ruling—that IFCA claims cannot be based on technical violations of non-substantive sections of the Washington Administrative Code—is a Pyrrhic victory for insurers. Though this ruling superficially limits the scope of IFCA, the Washington Supreme Court simultaneously announced that violations of substantive sections of the Washington Administrative Code are the equivalent of an unreasonable denial of claim and, therefore, actionable under IFCA. As a result, depending on the violation of the Washington Administrative Code, a policyholder’s IFCA claim may actually be stronger as a result of the Perez-Crisantos v. State Farm decision.
Washington’s Insurance Fair Conduct Act, passed 10 years ago, gives policyholders substantial leverage vis- à-vis insurers. An insurer who violates the IFCA statute is required to pay the policyholder’s actual damages, attorneys’ fees, and statutory costs (including expert costs). Furthermore, and where even more leverage accrues, an insurer who violates the IFCA statute may be additionally required to pay up to three times the policyholder’s actual damages in punitive damages. Needless to say, the possible imposition of treble damages is a powerful incentive for insurers to pay or settle disputed claims rather than take a chance in court.
While the penalties for violating the IFCA statute are clear, the threshold question of what constitutes a violation of the IFCA statute is less so. The IFCA statute, RCW 48.30.015, states that a “first party claimant unreasonably denied a claim for coverage or payment of benefits by an insurer” may bring an IFCA claim. However, the IFCA statute also says that an insurer who violates certain parts of the Washington Administrative Code violates the IFCA statute—specifically the sections of the IFCA statute allowing for the imposition of attorneys’ fees, statutory costs, expert fees, and treble damages. Accordingly, the question emerges: Does IFCA require an unreasonable denial of claim or can an insured bring an IFCA claim based solely on an insurer’s violation of the Washington Administrative Code, even where there was no “unreasonable” denial?
2. PEREZ-CRISTANOS V. STATE FARM
Until a month and a half ago the answer to that question depended on which federal judge considered the question. However, in February the Washington Supreme Court jumped at the opportunity to hold that an unreasonable claim denial is a prerequisite to liability under any section of the IFCA statute. This was a literal jump—the Washington Supreme Court took direct review from the trial court, skipping the Court of Appeals. The unusual move underscores the Court’s eagerness to weigh in on the IFCA statute—an opportunity which rarely presents itself due to insurers’ penchant for removing IFCA suits to federal court.
Perez-Cristanos v. State Farm arose out of a UIM claim. According to the insured, the UIM claim was denied. According to State Farm, it merely disputed the valuation of the claim. Ultimately the parties arbitrated the UIM claim, which resulted in the insured receiving an award of $51,000. However, after taking into account attorneys’ fees and payment of PIP benefits, the insured’s net recovery was closer to $24,000. Hoping to improve on this front, the insured amended his complaint to allege a violation of IFCA based on State Farm’s supposed violation of WAC 284-30-330(7) (prohibiting insurers from forcing insured into litigation, arbitration, or appraisal to “recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in such actions or proceedings.”).
The trial court was less than impressed. With regard to the alleged violation of WAC 284-30-370, the trial court found the insured’s claim that State Farm “had made a zero offer” on the UIM claim verged on the misleading. With regard to the unreasonableness of the denial, the trial court concluded that “[t]here has never been one scintilla of evidence” that State Farm’s actions were “unreasonable and there must have been some ulterior motive.” On summary judgment, the trial court dismissed the case with prejudice.
The insured sought direct review from the Washington Supreme Court, which was granted. There he argued that a regulatory violation, such as a violation of WAC 284-30-330(7), is independently actionable under IFCA. The Washington Supreme Court , noting a split in federal authority, turned to IFCA’s legislative history—no simple feat given that IFCA was both passed by the Legislature and ratified by Washington voters. Most persuasive to the Court was the final, official voter pamphlet which stated:
This bill would make it unlawful for insurers to unreasonably deny certain coverage claims, and permit treble damages plus attorney fees for that and other violations. Some health insurance carriers would be exempt.
The Court did not believe the foregoing language suggested “an intent to create a private cause of action for regulatory violations.” In other words, when the voters ratified the IFCA statute, the Washington Supreme Court believed those voters thought they were voting for a “cause of action for unreasonable denials of coverage.”
After noting that its interpretation was also consistent with statutory construction, the Court then weighed in on what it believed was a practical imperative:
If we found that violation of regulations listed in IFCA was independently actionable, then “[m]aking a claim payment to a first party claimant or beneficiary not accompanied by a statement setting forth the coverage under which the payment is made,” not responding until the 11th working day to “pertinent communications from a claimant reasonably suggesting that a response is expected,” and notifying a claimant on the 16th day that a claim had been accepted would all be actionable even if the insured was never unreasonably denied coverage or the payment of benefits.
The foregoing are all violations of the Washington Administrative Code, which the Court did not believe the Legislature intended to make independently actionable under IFCA.
3. NOT ALL VIOLATIONS OF THE WASHINGTON ADMINISTRATIVE CODE ARE CREATED EQUAL.
Can a violation of the Washington Administrative Code itself make a denial unreasonable and, therefore, actionable under IFCA? Clearly with regard to certain violations of the Washington Administrative Code, the Washington Supreme Court has signaled the answer to be “no.” However, with regard to other violations, the Court suggests the answer is “yes.” For example, the Perez-Cristanos court cited WAC 284–30–330(4) (declaring “[r]efusing to pay claims without conducting a reasonable investigation” unfair) as an example of a regulation whose violation itself “could be potentially actionable under IFCA.” This makes sense: How could a denial of claim be reasonable if the claim decision is based on an unreasonable investigation? Likewise, the Supreme Court cited one if its previous decisions in which it affirmed the trial court’s bad-faith finding on the basis of the insurer’s violation of WAC 284-30-330(13) (declaring “failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement” unfair) and “unconscionable delay.”
4. WHAT’S NEXT?
It is now for the lower courts to decide which violations of the Washington Administrative Code are tantamount to an unreasonable denial of coverage. While the Washington Supreme Court has offered some guidance on this score, there will doubtlessly be ample briefing from the insurer and policyholder bars on this subject. As with most insurance coverage questions, the burden will likely fall on Washington’s federal district courts to separate the Washington Administrative Code into sections whose violation constitute only Consumer Protection Act violations and those whose violation constitute Consumer Protection Act and IFCA violations.
What Perez-Cristanos does not address is also important. IFCA allows a “first party claimant” to assert an IFCA claim. “First party claimant” is expansively defined as “an individual, corporation, association, partnership, or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract.” Despite the breadth of this definition, Judge Pechman of the Western District of Washington has concluded that only insureds under first-party policies may assert IFCA claims (think property or UIM insurance). Were Judge Pechman’s interpretation to be adopted by the Washington Supreme Court, it would foreclose any insured under a liability policy—often referred to as third-party insurance—from asserting IFCA claims. This would be a massive blow to a huge segment of Washington insureds.
That possibility is just as unclear after Perez-Cristanos. The Washington Supreme Court stated the question in Perez-Cristanos as requiring it to “decide whether first party insureds can also sue their insurance companies under IFCA for regulatory violations.” The fact the Court chose to say “first party insureds” instead of “first party claimants” will likely be seized on by insurers and set forth in their briefing with much fanfare. On the other hand, (1) an insured is still by definition a first-party insured under a third-party liability policy, and (2) every other federal district court considering the matter has disagreed with Judge Pechman. Furthermore, the very federal district court decision the Washington Supreme Court cited when coming to its decision in Perez-Cristanos involved a first-party insured/first-party claimant making a claim under a third-party liability policy. All in all, both sides will take what they want from Perez-Cristanos. Hopefully, the Washington Supreme Court, having gotten a taste for IFCA interpretation, will find another opportunity to address the many additional unanswered questions concerning IFCA before another 10 years pass.