Bad Faith Absent a Contractual Duty? Federal District Court Certifies Questions to Washington Supreme Court

On July 9, 2007, Judge Robert S. Lasnik of the United States District Court for the Western District of Washington certified the following questions to the Washington Supreme Court:

(1) Under Washington law, does an insured have a cause of action against its liability insurer for common law procedural bad faith for violation of the Washington Administrative Code and/or for violation of the Washington Consumer Protection Act, even though a court has held that the insurer had no contractual duty to defend, settle, or indemnify the insured?

(2) If the answer to the first question is “yes,” then:

(a) Should the court require the insured to prove that the insurer’s conduct caused actual harm, or should the court apply a presumption of harm? and

(b) How should the insured’s damages be measured?

These questions arise in a case involving alleged “fax blasting” in violation of the Telephone Consumer Protection Act of 1991 (TCPA), 47 U.S.C. § 227, the Washington Unsolicited Telefacsimile Act (WUTA), RCW 80.36.540, and the Washington Consumer Protection Act (CPA), chapter 19.86 RCW. Onvia, the fax sender, had liability insurance with St. Paul Fire & Marine. St. Paul allegedly delayed nine months before responding to a notice of claim and tender of defense by Onvia, and then denied coverage and defense.

The plaintiff and Onvia entered into a covenant judgment in the amount of $17.515 million, and the plaintiff sought coverage and alleged bad faith against St. Paul based on an assignment of Onvia’s rights. The federal district court ruled that St. Paul had no duty to defend, indemnify, or settle the underlying action against Onvia and that St. Paul’s refusal to defend was not in bad faith. The certified questions relate to St. Paul’s alleged violations of state insurance claims handling regulations, including failing to timely acknowledge the notice of claim and tender of defense, failing to investigate, and failing to regularly report developments to the insured. The plaintiff alleges common law bad faith and violations of the CPA.

Although the Washington Supreme Court is not required to answer the certified questions, it likely will.

The federal case is St. Paul Fire & Marine Insurance Co. v. Onvia, Inc., No. C06-1056RSL.