Washington Supreme Court Insulates Insurance Companies from IFCA Lawsuits Based on Regulatory Violations

The Washington Supreme Court issued a recent decision that significantly limits the scope of claims an insured can make against its insurer under the Washington Insurance Fair Conduct Act (IFCA).  In Perez-Crisantos v. State Farm Fire and Casualty Co., No. 92267-5, WL 448991 (February 2, 2017), the Court insulated insurers that violate insurance regulations by ruling that the insured could not sue the insurer under IFCA for regulatory violations alone, but rather only in conjunction with the insurer unreasonably denying coverage or payment of benefits.

IFCA was enacted in 2007 to grant insureds statutory legal recourse against an insurer that unreasonably denies coverage or payment of benefits.  IFCA is considered an insured-friendly law as its consequences for the insurer are harsh.  If an insured prevails in an IFCA lawsuit, the court awards the insured its reasonable attorney fees and costs and may award up to three times its damages if the insurer unreasonably denied coverage or payment of benefits or violated enumerated specific unfair claims settlement regulations, which prohibit certain claims handling practices.

An insurer’s violation of these regulations is evidence of bad faith.  For years, insureds have been able to lodge bad faith and Consumer Protection Act lawsuits against insurers that violate these regulations.  However, a great debate began between insurers and insureds as to whether regulatory violations alone, in the absence of an unreasonable denial of coverage or benefits, could support an independent claim against the insurer under IFCA.  In insured-friendly Washington, courts have sided with insureds allowing claims against insurers under IFCA for regulatory violations even when the insurer accepted coverage, and even when the insurer violated more trivial regulations.  However, the debate came to a head in 2015 when two federal court judges issued opposite decisions – one judge holding that IFCA did create a cause of action for regulatory violations standing alone and the other judge holding it did not.

On February 2, 2017, the Washington Supreme Court settled the debate, ruling that unless the insured was unreasonably denied coverage or payment of benefits, insurers could not also be sued under IFCA for violating these regulations.  Because the Court engaged in an extensive analysis of the language of the statute and the intent of the legislature and voters that led to its enactment, the Court’s ruling has a broad effect extending beyond the particular circumstances of the underlying case.  Nevertheless, the facts underscore the stance taken by the Washington Supreme Court in favor of insurers because in the Perez-Crisantos case, the insurer was alleged to have violated one of the more serious claims handling regulations.

The Perez-Crisantos Case

The case began when Perez-Crisantos was rear-ended by another driver in snowy eastern Washington and incurred more than $50,000 in medical bills after the accident.  The other driver carried minimal liability insurance limits of only $25,000, so after collecting those limits, Perez-Crisantos looked to his own insurer, State Farm, for benefits under his Personal Injury Protection (PIP) and Underinsured/Uninsured Motorist (UIM) coverage.  State Farm determined that portions of Perez-Crisantos’ treatment was unrelated to the accident and that he had been fully compensated for his damages by prior payments from the liability carrier for the at-fault driver and PIP benefits paid by his own insurer.  As a result, State Farm refused to pay any benefits under the UIM coverage but contended that it did not technically deny coverage or payment of benefits with respect to the claim.  Perez-Crisantos submitted his UIM claim to arbitration and received a gross award of $51,000 against State Farm.  After adjusting for the settlement with the at fault driver’s insurance, PIP benefits and attorney fees Perez-Crisantos received about $24,000 from the UIM arbitration.

Perez-Crisantos sued State Farm for bad faith, negligence, and violations of the Consumer Protection Act, and IFCA, based upon violation of regulations relating to unfair settlement practices.  Specifically, Perez-Crisantos argued that State Farm violated the regulation deeming it unfair or deceptive for an insurer to make a claimant litigate to recover amounts due under an insurance policy by offering substantially less that the amounts ultimately recovered in the litigation.  Perez-Crisantos further argued that violation of this regulation, by itself, created an independent cause of action under IFCA against State Farm.  The Court ruled against Perez-Crisantos, insulating State Farm from Perez-Crisantos’ IFCA claim because State Farm did not also unreasonably deny coverage or benefits.

In the decision, the Court expressed concern about making each violation of a regulation the basis for a lawsuit.

Some regulations control serious unfair practices, like the one raised by Perez-Crisantos, while others are more trivial, like those requiring insurers to respond to communications within a certain number of days.  Insureds are often accused of using an insurer’s violations of more trivial regulations to coerce insurers into accepting coverage or paying more in benefits, as well as inflating the value of an IFCA claim by stacking up minor violations.

Realistically, this decision is not expected to be a significant obstacle to insureds holding insurers accountable if they unreasonably deny coverage or payment of benefits, as those are most often the large dollar claims that are pursued in any event.  Where insurance companies unreasonably deny coverage or payment of benefits, violations of the unfair claims settlement regulations will continue to enhance the policy holder’s success in recovering an award of attorney fees, costs and up to treble damages.

If you or your business has questions concerning this new decision or other complex issues in insurance coverage, please feel free to contact Michelle Kierce or any of the other insurance coverage attorneys at MPBA.