Liability Insured May Claim Bad Faith Even in the Absence of Any Contractual Duty, but Harm Will Not Be Presumed

St. Paul Fire & Marine Insurance Co. v. Onvia, Inc. (Wash. S. Ct., November 26, 2008).

The Washington Supreme Court held that an insured under a third-party liability policy may have a cause of action against the insurer for bad faith and violation of the Washington Consumer Protection Act (CPA) even if the insurer had no contractual duty to defend, settle, or indemnify the insured. But harm will not be presumed, and damages must be proven.

In this case, the insured, Onvia, Inc., was served with a class action complaint alleging that it sent unsolicited faxes in violation of the Telephone Consumer Protection Act, which provides for an award of civil penalties in the amount of $500 to $1,500 per facsimile, depending on whether the sender acted willfully. The plaintiff, RMS, alleged that it received one of Onvia’s faxes.

Onvia’s insurance broker allegedly tendered the class action complaint to Onvia’s insurer, St. Paul Fire & Marine, via facsimile in February 2005, but St. Paul had no record of receiving the fax and did not respond. The tender allegedly was resubmitted in August 2005 and, at some point, Onvia sent a copy of an amended complaint that was filed in September 2005. St. Paul sent Onvia a letter in November 2005 denying coverage and defense.

In April 2006, while a motion for class certification was pending, Onvia and RMS stipulated to class certification and entry of a judgment in the amount of $17.515 million. Onvia assigned its rights against St. Paul to RMS, which agreed to execute the judgment only against St. Paul. The trial court approved the settlement as reasonable.

Meanwhile, St. Paul filed suit in federal district court seeking a declaratory judgment that it had no duty to defend, settle, or indemnify. RMS, as Onvia’s assignee, alleged counterclaims including “procedural” bad faith and violation of the CPA related to St. Paul’s handling of Onvia’s tender.

The district court ruled that St. Paul properly denied a defense and coverage and did not act in bad faith in doing so. On whether the “procedural” bad faith and CPA claims were viable, the district court certified questions to the Washington Supreme Court.

The supreme court was guided by its decision in Coventry Associates v. American States Insurance Co. that an insured under a first-party insurance policy may claim bad faith even though coverage was properly denied. The court reasoned, “Although Coventry involved a first-party claim and here we have a third-party claim, there is no appreciable difference between this case and Coventry with respect to whether bad faith claims mishandling remains actionable in the absence of coverage.” Absent a duty to defend, however, coverage by estoppel is not an available remedy for bad faith, and harm will not be presumed. The court held, “As in Coventry, RMS must prove actual harm, and its ‘damages are limited to the amounts it has incurred as a result of the bad faith . . . as well as general tort damages.’”

As for the CPA claim, the court held that a liability insurer can be held liable for violating the CPA—even in the absence of a duty to defend or indemnify—based on violations of the claims-handling regulations in chapter 284-30 Washington Administrative Code. The remedies for such a claim are “the statutory remedies available to any successful CPA claimant.”

Under this decision, RMS might recover actual damages suffered by Onvia, if any, and “general tort damages” if it can prove that St. Paul handled Onvia’s tender in bad faith. If St. Paul violated WAC 284-30 and the CPA, RMS might recover actual damages—potentially trebled up to $10,000—plus attorney’s fees. But St. Paul won’t be stuck with the $17.515 million judgment.