Insurer Acted in Bad Faith in Refusing to Disclose Underwriting File to Policyholder Attempting to Settle Liability Claim Where Coverage Was Disputed

Sharbono v. Universal Underwriters Ins. Co. (Div. 2, June 26, 2007)

The Sharbonos’ daughter lost control of her vehicle, causing the death of another driver, Cynthia Tomyn. The Sharbonos believed they had $3 million of personal umbrella coverage with Universal Underwriters. They contended they had asked their insurance agent to add $1 million of personal umbrella coverage to each of three commercial policies issued to their three automobile transmission shops. Universal and the insurance agent contended that the Sharbonos requested and had only $1 million of umbrella coverage under a single policy. Universal offered to pay that amount toward any settlement.

In the context of attempting to settle at mediation before suit was filed, the Sharbonos requested that Universal produce its underwriting file. Universal refused on trade secret grounds, but offered to produce any documents the Sharbonos signed or submitted. After two unsuccessful mediations, the Tomyns sued the Sharbonos and subpoenaed the underwriting file. Universal’s motion to quash was denied. While discretionary review of that ruling was pending, the parties settled for a covenant judgment of $4,525,000, which the trial court held was reasonable. Then, the Sharbonos sued Universal for coverage and alleged various claims including common law bad faith for refusing to produce the underwriting file and a per se violation of the Consumer Protection Act (CPA) based on WAC 284-30-330(7) (“compelling insureds to institute or submit to 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 granted summary judgment in the Sharbonos’ favor on coverage, bad faith, and the per se CPA violation. The jury awarded $4.5 million. Universal appealed.

The court of appeals affirmed the trial court’s ruling that refusing to provide the underwriting file to the policyholders was bad faith as a matter of law. The court viewed Universal’s argument that underwriting file may contain trade secret information as “plausible,” but observed that Universal failed to point to a single document containing such information. Also, Universal offered the entire underwriting file as evidence in the trial court. The court concluded: “Based on the Sharbonos’ repeated requests for the underwriting file, together with their reasons for needing the documents, a reasonable person could conclude that disclosure was in the Sharbonos’ best interest. And more importantly, Universal failed to demonstrate any significant need to protect the contents of its underwriting files and that such need weighed as heavily as the Sharbonos’ interests.”

The court reversed the coverage ruling and held that the Sharbonos had only $1 million of umbrella coverage under a single policy, a decision that turned on the definition of “You” in the policies as referring to the Sharbonos’ businesses as opposed to them individually. The court affirmed the reasonableness of the Sharbono-Tomyn settlement based on the Glover/Chausee factors. The court reversed the ruling that Universal committed a per se violation of the CPA, holding that WAC 284-30-330(7) did not apply because the Sharbonos did not prevail in establishing the coverage limits they claimed they had. The court left open the possibility that the Sharbonos could establish a non-per se CPA violation based on the five elements of a CPA claim. The court remanded for a new trial on that issue and the issue of damages for common law bad faith and any non-per se CPA violation, as the jury in the first trial did not apportion damages among the claims.