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Fair conduct laws are anything but Washington becomes the newest state where insurers stand to be fleeced.

"Be fair to one another." It's one of the simplest rules of any relationship. Yet ongoing legislative attempts to require fairness in the insurer-insured relationship involve unilateral requirements for insurers that are inapplicable to policyholders.

Case in point: Washington State's recent voter-approved Referendum 67. It ratifies the state's Insurance Fair Conduct Act, which provides a new statutory basis for a wide range of so-called "insurer bad faith" claims.

IFCA is harder to apply than its proponents' simplistic "insurance fairness" message suggests. They describe IFCA as addressing only first-party claims. However, the act is broadly worded, and litigation may be needed to determine whether its definition of "first-party claimant" encompasses insureds under liability insurance policies, also called "third-party" policyholders.

Likewise, the act's penalties sound very basic. IFCA permits uncapped treble damages--that is, three times the actual damages that normally would be awarded to the aggrieved party. But any actual tripling of damages will be left to the Superior Court's individual discretion. The act also mandates that insurers bear responsibility for reasonable costs of expert witness fees and attorneys' fees incurred in establishing the claim.

However, the real-life application of these penalties is not necessarily straightforward. Insurers, the law says, "may not unreasonably deny a claim for coverage or payment of benefits" to claimants who are "asserting a right to payment as a covered person." But IFCA supplies no guidance regarding when it applies. Its provision for penalties extends to insurers who have violated any one of at least 37 regulations previously adopted by Washington's Office of the Insurance Commissioner.

Washington is one of only five states preventing punitive damages unless expressly authorized by the legislature. Barr v. Interbay Citizens Bank of Tampa, a 1981 Washington Supreme Court opinion, relied on an "unbroken line of cases" since 1891 for this proposition. Barr further listed potential treble-damage awards under Washington's Consumer Protection Act as the first "narrow exception" made by the Legislature disallowing punitive damages.

Washington cases previously called such treble-damage awards "exemplary" damages, or punitive damages. Since the Washington Supreme Court observed no distinction between treble damages and exemplary damages in 1981, it is difficult to distinguish IFCA's penalties from punitive damages.

Therefore, the act would authorize discretionary punitive damages in all but name, for merely "unreasonable" acts or omissions by an insurer. In turn, litigation is anticipated over whether IFCA passes constitutional muster. Maryland enacted new "bad faith" legislation in 2007, and approximately 10 other states have either considered or passed new "bad faith" laws since 2006. The Washington act's standards for punitive damages against insurers may be the lowest in the nation, and other state legislatures may soon be requested to follow Washington state's example.

Given this, insurers should seek clarification on the meaning of important terms such as "first party" and "penalties" in initial committee hearings, when new bad-faith laws are proposed and there's sufficient time to negotiate specifics and obtain greater certainty.

Otherwise, what may seem simple at first could become enormously complex and costly in actual practice.

Michael D. Handler, a Best's Review contributor, is a member of the Seattle office of law firm Cozen O'Connor. He can be reached at
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Title Annotation:Regulatory/Law: Legal Insight
Comment:Fair conduct laws are anything but Washington becomes the newest state where insurers stand to be fleeced.(Regulatory/Law: Legal Insight)
Author:Handler, Michael D.
Publication:Best's Review
Geographic Code:1U9WA
Date:Feb 1, 2008
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