Court: Court of Appeals of Washington; June 1, 1999; Washington; State Appellate Court
Insurers have a duty of good faith towards their insureds, which is central to this class action lawsuit involving State Farm Insurance Companies. The plaintiffs, three policyholders, demonstrated sufficient material facts regarding State Farm's handling of claims to withstand summary judgment. A quasi-fiduciary relationship exists between insurers and insureds, raising questions about whether State Farm adequately disclosed relevant information related to its retroactive claim denials.
Citing Coventry Associates v. American States Insurance Co., the court noted that an insured can pursue an action against an insurer for bad faith, even if the insurer ultimately determines that coverage does not exist. The insurance policy mandates a 30-day settlement period or timely notice of denial with reasons for any delays, suggesting potential breaches by State Farm.
The class action, initiated in 1994, involved claims for medical expenses denied retroactively by State Farm beyond the allotted time. The representatives alleged that State Farm failed to meet policy requirements for timely payments or proper notifications. In 1996, the representatives sought partial summary judgment on the duty and breach issues, while State Farm sought dismissal of all claims. The trial court denied the representatives' motion but accepted State Farm's, leading to an appeal.
The insurance policy outlines that payments for medical expenses must occur within 30 days of proof of the amount due, based on reasonable and necessary expenses. State Farm's letters to the representatives highlighted policy coverage but also indicated that claims might undergo evaluations by external review boards. The representatives contend that State Farm's retroactive claims procedures unfairly disadvantage insureds. The court found that there remains a justiciable controversy regarding State Farm's adherence to policy requirements and reversed the summary judgment, remanding the case for trial.
The standard of review and the principles for interpreting insurance policies apply in this case, emphasizing the fiduciary relationship between insurers and insureds. State Farm is held to an enhanced fiduciary obligation, requiring fair treatment and equal consideration of the insured's interests. The representatives assert that State Farm breached three fiduciary duties: (1) the duty to disclose helpful information to protect the insured’s interests, (2) the duty of equal consideration, and (3) the duty not to mislead. A factual question arises regarding whether State Farm adequately disclosed the possibility of retroactive denial of medical claims.
State Farm contends that its policies and communications clarify its right to retroactively deny claims, arguing there was no failure to disclose. However, the adequacy of notice regarding such retroactive denial remains a question for the trier of fact, particularly considering the insurer's knowledge of ongoing medical treatment. The representatives challenge the reasonableness of delays in communication about claims, arguing that insurers cannot change coverage terms retroactively through subsequent notices.
On the issue of contractual breach, the representatives claim that State Farm is obligated to pay or deny claims within 30 days or provide proper notice for any delays. State Farm disputes this interpretation, arguing that the class must prove that submitting medical bills constitutes “proof of the amount due” and that a promise to pay within 30 days implies a promise to deny within the same timeframe. The representatives maintain that submitting claims on State Farm’s forms satisfies the requirement for proof. Washington case law defines "proof" as the necessary notice for insurers to assess their obligations. A cited case, Reichl v. State Farm, is noted as distinguishable due to different circumstances regarding timely provision of information. In this case, State Farm properly acknowledged receipt of claims but failed to keep the insureds informed about the status of their claims.
The issue at hand is the reasonableness of State Farm's claims handling under its insurance policy, which requires factual determination by a trier of fact. Washington regulations, specifically WAC 284-30-370 and WAC 284-30-380, mandate insurers to complete claim investigations within specified timeframes and to keep insured parties informed of claim statuses. State Farm failed to comply with these requirements by not updating the insureds on the progress of their claims for four to six months after an initial request for information. This non-compliance supports claims of breach of contractual duties and potentially unfair or deceptive practices, despite these regulations primarily addressing bad faith and Consumer Protection Act (CPA) claims.
To pursue damages under the CPA, a party must demonstrate that the defendant's actions are unfair and deceptive, related to trade or commerce, affect public interest, cause injury, and result in damages. A previous case, Downie v. State Farm Fire, established that an insurer can justify delays in claim processing if they adequately communicate the need for additional information. However, State Farm's lack of ongoing communication distinguishes the current case from Downie, raising questions about potential violations of unfair claims settlement practices and misrepresentations of policy provisions.
A single violation of relevant regulations constitutes a violation of RCW 48.30.010, which is deemed a per se unfair trade practice under RCW 19.86.170, fulfilling part of the CPA claim criteria. State Farm contends that the representatives have not proven harm or damages, which is essential for CPA or bad faith claims. However, the representatives argue that delays in claim resolution led to increased personal liabilities and additional medical expenses for class members. State Farm asserts it is only liable for unpaid benefits, but the representatives challenge this position.
State Farm’s claim-handling practices may delay resolution, potentially harming insured parties who pursue medical treatment under the assumption they are covered. The existence of factual questions regarding the damage to claimants is noted. In the context of bad faith claims handling, the trial court's dismissal of the representatives' action was deemed erroneous. The Supreme Court affirmed that first-party insureds can sue insurers for bad faith investigation or violations of the Consumer Protection Act (CPA), regardless of the insurer's eventual coverage determination. The court emphasized the insurer's obligation to conduct timely and reasonable investigations before denying claims, which can breach the implied covenant of good faith and fair dealing inherent in insurance policies.
The case was improperly dismissed on summary judgment, leading to a reversal and remand for trial. Specific examples illustrate the claims: Tina Van Noy, injured in an October 1993 accident, experienced delayed responses from State Farm regarding her medical expenses, including unclear communication about coverage and potential liabilities for her care. Similarly, Patricia Faye Dinnis, injured in May 1993, faced a four-month delay before State Farm informed her that her claims were under peer review, without warning her of the possibility of rejection. These cases underscore the detrimental impact of State Farm's claim practices on insured individuals.
Seven months post-accident, State Farm notified the claimant that most of her treatment claims were denied. Subsequently, State Farm acknowledged that its policies did not permit outside reviews until after July 1, 1994. Summary judgment may be granted when no genuine material fact exists and the moving party is legally entitled to judgment. Courts evaluate facts favorably for the nonmoving party regarding such motions. Insurance policy interpretation is a legal question, assessed based on how an average person would understand the language. If a policy contains ambiguities—defined as language that allows for two reasonable interpretations—these must be resolved in favor of the insured when extrinsic evidence fails to clarify. State Farm's use of "retrospective" rather than "retroactive" is noted, but the policy’s 30-day deadline does not necessarily limit its ability to investigate claims beyond that timeframe. The court emphasizes that the policy must include the entire contract and suggests that not all claims need to be discussed, particularly regarding the allowance of external review processes. A series of cited cases supports these interpretations and principles.
