Q & A on Referendum 67

With Election Day about a week away, if you live in Washington State or are involved in Washington’s insurance industry, you have probably seen and heard a lot about Referendum 67 but still have questions. Here are answers to some basic questions about R-67, including a few answers you may not have seen elsewhere.

How would R-67 change Washington law if approved?

The most fundamental change to existing law would be to permit recovery of up to three times the amount of actual damages in certain actions by policyholders against their insurers. Although tripling the damages would be discretionary for the court, the text of R-67 offers no guidance on when to do so.

An award of litigation costs, attorney’s fees, and expert witness fees to the prevailing plaintiff would be mandatory under R-67. Under existing law, litigation costs and attorney's fees are recoverable under the Washington Consumer Protection Act, along with triple damages up to $10,000.

What would be the standard for liability under R-67?

A violation of R-67 would occur if an insurer were to “unreasonably” deny a claim for coverage or payment of benefits or violate any of several regulations pertaining to claims handling. Most states require a finding of intentional, willful, or malicious conduct by the insurer to impose punitive damages.

Would premium rates increase?

Premium rates depend on many factors, but one respected actuarial firm has predicted that premium rates would rise if R-67 were approved. View the report here.

Does Washington law prohibit insurers from considering amounts paid to satisfy bad faith judgments in their rate filings?

Washington has no statute or regulation excluding extra-contractual payments from rate-filing calculations.

Who would be allowed to sue under R-67?

R-67 would allow suit by a “first party claimant,” which is 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.” It is anticipated that claims would be asserted with respect to most types of insurance coverage.

Would claims under R-67 be assignable?

In general, a cause of action that allows recovery of a penalty (such as triple damages) is not assignable. However, this issue will be litigated if R-67 is approved.

Who would be subject to suit under R-67?

Every “insurer” transacting insurance in Washington State might be sued under R-67, with the exception of a “health plan offered by a health carrier.” A “health carrier” includes disability insurers, health care service contractors, and HMOs. A “health plan” is a “policy, contract, or agreement offered by a health carrier to provide, arrange, reimburse, or pay for health care services,” however, there are several exceptions including long-term care insurance, Medicare supplemental insurance, disability insurance, worker’s compensation insurance, employer-sponsored self-funded health plans, dental-only, and vision-only coverage.

When would R-67 become effective if approved?

If approved by a majority vote of the voters, the new law would become effective on the 30th day after the election, December 6, 2007.

Would R-67 apply retroactively to claims predating the effective date of the Act?

Washington statutes are presumed to apply prospectively only. So-called “remedial” legislation may apply retroactively, but not if it imposes a penalty. In 1975, the Washington Supreme Court held that the Washington Consumer Protection Act, which permits an award of treble damages subject to a cap, does not apply retroactively. However, this issue will be litigated if R-67 is approved.

Insurer Defending under Reservation of Rights Acted in Bad Faith by Sending Subpoena to Arbitrator for Coverage-Related Information

Mutual of Enumclaw Ins. Co. v. Dan Paulson Construction, Inc. (Wash. S. Ct. 2007)

The Martinellis filed an arbitration claim against Dan Paulson Construction, Inc. (DPCI), alleging construction defects. DPCI’s insurer, Mutual of Enumclaw (MOE), agreed to defend under a reservation of rights. Before arbitration commenced, MOE filed a declaratory judgment action to determine coverage. Suspecting that DPCI would seek a lump sum award in arbitration, depriving MOE of the ability to determine the portions of the damage award, if any, that were for covered claims, MOE sent the arbitrator a subpoena duces tecum and planned to depose him with written questions after the hearing. MOE also sent the arbitrator a cover letter that was not copied to the parties. DPCI, the Martinellis, and the arbitrator demanded that MOE withdraw the subpoena.

During the arbitration hearing, DPCI and the Martinellis settled for a covenant judgment -- a stipulated arbitration award and judgment of $1.3 million, subject to a covenant not to execute. DPCI assigned its coverage and bad faith claims against MOE to the Martinellis, who counterclaimed in MOE’s declaratory judgment action that MOE acted in bad faith by sending the subpoena and ex parte cover letter to the arbitrator. The trial court agreed and entered summary judgment for the Martinellis, ordering MOE to provide coverage by estoppel of the stipulated judgment plus attorney’s fees, costs, and interest.

The court of appeals reversed, holding that MOE’s actions did not amount to bad faith because MOE faced “unreasonable options”: risking a bad faith claim by litigating coverage issues before arbitration or being forced to pay the entire award or settlement regardless of whether it was based on covered claims. On MOE’s discovery requests to the arbitrator, the court held: “This tactic, while somewhat clumsy, did not amount to bad faith.”

The Washington Supreme Court unanimously reversed the court of appeals and held that MOE demonstrated greater concern for its own interests than for its insured’s financial risk. This constitutes bad faith under Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 715 P.2d 1133 (1986). The supreme court disagreed with the notion that MOE faced “unreasonable options.” The court stated: “An insurer defending under a reservation of rights is not automatically liable to pay the entire settlement amount. … Absent a successful bad faith claim and the resulting coverage by estoppel, the insured ‘still has the burden of proving how much of the [settlement] should be allocated to covered claims.’” Slip op. at 16, quoting Thomas V. Harris, Washington Insurance Law § 17.8, at 17-19 (2d ed. 2006).

The remedy of coverage by estoppel is applied in Washington when an insurer (1) provides no defense and the failure to defend is in bad faith or (2) provides a defense but places its own interests above the insured’s interests while doing so. The supreme court reaffirmed that the amount of a covenant judgment is the presumptive measure of an insured’s harm caused by the insurer’s bad faith if the covenant judgment is reasonable. The court rejected the insurer’s argument that intervening to participate in the reasonableness hearing would have been futile because the trial court’s authority to overturn the arbitrator’s finding of reasonableness was limited by the statutory scheme governing arbitration awards.

The supreme court also concluded that MOE failed to rebut the presumption that its actions, including the filing of the declaratory judgment action, harmed DPCI. The court concluded that MOE’s conduct caused uncertainty and increased risk for DPCI’s defense, interfered with its preparation for the arbitration hearing, interjected coverage issues into the arbitration, and might have prejudiced the arbitrator. While acknowledging that rebutting the presumption of harm is “almost impossible,” the court held MOE to this requirement because, “[a]s between the insured and the insurer, it is the insurer that controls whether it acts in good faith or bad. Therefore, it is the insurer that appropriately bears the burden of proof with respect to the consequences of that conduct.” Slip op. at 19. In addition, while the filing of a declaratory judgment action is not in and of itself bad faith, an insurer cannot use a declaratory judgment action to interfere with the defense of the underlying case.