The Washington legislature and state supreme court are taking steps, and contemplating others, with ramifications for insurers and businesses both inside and outside the State of Washington.
I. Common Law Bad Faith
Washington State is not a friendly forum for insurers and health carriers on the receiving end of a class action complaint or other lawsuit by insureds/first-party claimants. The law of extra-contractual bad faith liability is well developed and weighs strongly in favor of the insured. For example, the Washington supreme court recently held that an insurer acted in bad faith in relying on an assault and battery exclusion for a claim brought by a man shot nine times.1 In another case, the insurer was held to have acted in bad faith for denying coverage under the intentional acts exclusion when its insured (a dentist) was sued after placing toy fangs in a sedated employee's mouth and taking photos for the enjoyment of his office staff.2
This underlying substantive law imposing extra-contractual liability for "unreasonable" decisions makes class action claims more lucrative for proponents of such claims. Numerous Washington State class actions have been filed against insurers in recent years. By way of example, property casualty insurers have been sued for using other than OEM auto replacement parts. They also have been sued for utilizing UCR provider reimbursement under auto policy personal injury protection and medical pay coverages. Health carriers have been sued in class actions for provider reimbursement bundling, failure to adequately cover mandated benefits and failure to secure PPO rates for subscribers who are paying out of pocket.
II. Statutory Exemplary Damages
Lawsuits against insurers frequently allege a violation of the Washington Consumer Protection Act which affords recovery of attorney fees and limited exemplary damages to a successful litigant. With the legislature's adoption of the Insurance Fair Conduct Act in 2007 (affirmed by popular vote on an insurance-industry-sponsored referendum), Washington became an even more attractive forum for those inclined to sue insurers and health carriers. Previously, Washington was almost unique in limiting the availability of punitive damages to narrowly defined and unusual circumstances, e.g., timber trespass. In a departure from historical practice, the IFCA allows liberal recovery of punitive damages from insurers. "First party claimants" can recover treble damages and attorneys' fees for an "unreasonable" denial of a claim or payment of benefits. This unusually low burden is attractive to class action proponents.
III. Extraterritorial Reach of Washington Law
Whether the effects of the legislation are confined to the State of Washington or have national reach has been the subject of state supreme court and legislative action in the last year. In the case of Schnall v. AT&T,3 nationwide class status was sought under the Washington State Consumer Protection Act. Although the defendant was a wireless company, the case was perceived as having ramifications for the insurance industry because it dealt with fundamental class action certification principles.
In its February 9, 2010 decision,4 the state supreme court affirmed the trial court's denial of class certification stating, "Washington has no interest in seeing contracts executed by [defendants'] representatives in other states with citizens of those states examined and adjudicated in Washington courts."5 The court continued, "Nothing in our law indicates that [Consumer Protection Act] claims by nonresidents for acts occurring outside of Washington can be entertained under the statute .... A private claimant cannot state a CPA claim by proving the defendant's practices affected the public interest or the citizens of another state."6
Regrettably, from the standpoint of insurance and business interests, the court later took the unusual step of withdrawing the opinion. In a new opinion, issued on April 14, 2011,7 The court deleted the extraterritoriality discussion, thereby leaving open the tantalizing question of whether Washington courts will become super policemen over interstate commerce.
Thereafter, the Washington State Attorney General proposed legislation in the 2011 session. That legislation 8 would have expanded the definition of "person" in the Consumer Protection Act to include natural persons or entities residing or located outside the State of Washington. The definitions of "trade" and "commerce" would have been broadened to include commerce involving a person or entity outside the state.
Insurance industry associations, civil litigation defense lawyers and business trade groups opposed the measure and were successful in defeating it.
It is anticipated that the bill will be reintroduced in the 2012 legislative session. In the meantime, the State Supreme Court may revisit the extraterritorial reach of Washington State exemplary damage statutes that frequently form the basis of class action complaints against insurers and health carriers.