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When Randy asked us to write this article, our first reaction was that Washington coverage law really is as bad as people think. As if to reinforce this reaction, just before we began writing this article, the Washington Supreme Court issued Xia v. ProBuilders Specialty Ins. Co. RRG, No. 92436-8 (slip op., April 27, 2017), __Wn.2d __, __ P.3d __ (2017), which, like rain on the Fourth of July, dampened our enthusiasm. However, like the weather in Seattle, there are still areas where the law is not yet a complete disaster for insurers.

So how bad is Washington law, really? Certainly, Washington law on the duty to defend overwhelmingly favors the insured. The duty to defend is triggered if the policy conceivably covers the allegations in the complaint. An ambiguous complaint is liberally construed in favor of triggering a duty to defend, and if there is any reasonable interpretation of the facts or the law that could result in coverage, the insurer must defend. In Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 164 P.3d 454 (2007), and in American Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 229 P.3d 693 (2010), the Court broadened these standards, by ruling that an insurer cannot deny a defense even absent on point Washington case law if authority from another jurisdiction arguably supports a duty to defend, where the insured’s counsel had provided that authority to the insurance company.

Although these standards, on their face, may not appear significantly different from case law in other jurisdictions, it is the, shall we say “liberal” (being in polite company), application of the standards that define the pitfalls of Washington coverage law for insurers. For example, in Woo, the insured dentist repeatedly taunted an employee about her potbelly pigs and then ordered boar tusk flippers, placed the flippers in her mouth during a dental proceeding, pried her eyes open, took photographs of her with the flippers in her mouth, had the photographs developed, and gave the photographs to her. Even though the conduct was intentional and required planning, the Court found that the complaint may have alleged an “accident,” during the “practice of dentistry,” giving rise to a defense obligation.

To add salt to the wound, Washington courts recognize a very low threshold for what constitutes a “bad faith” failure to defend. Our Supreme Court has given lip service to the principle that in order to establish bad faith, an insured must show the insurer’s breach of contract was “unreasonable, frivolous, or unfounded” and that “[b]ad faith will not be found where a denial of coverage or a failure to provide a defense is based upon a reasonable interpretation of the insurance policy.” See, e.g., Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 951 P.2d 1124 (1998). However, in recent decisions, the court has found bad faith even where the insurer’s decision was reasonable based upon existing Washington law. For example, the court in Xia did not even bother to discuss the “frivolous/unreasonable/unfounded” standard and held that an insurer committed bad faith for “trying to circumvent a rule that [the court had] never before applied in this type of case.” Xia slip op. at 5 (Madsen, J., dissenting). The dissents in both Alea and Xia correctly accused the majority of creating a presumption that a breach of the duty to defend is per se evidence of bad faith, an accusation seemingly fulfilled by the ruling in Xia.

Further, to douse the salted wound with pepper, Washington law imposes a rebuttable presumption of harm when a wrongful breach of the duty to defend is established, and, if the presumption is not rebutted, the insurer is estopped from denying coverage. Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992). A wrongful denial may also subject the insurer to treble damages under the Washington Insurance Fair Conduct Act (“IFCA”). And the Washington State Court of Appeals has held that a stipulated covenant judgment settlement that is found “reasonable” by the court “sets a floor, not a ceiling, on the damages a jury may award” in an assigned bad faith case. Miller v. Kenny, 180 Wn. App. 772, 325 P.3d 278 (2014).

And then there is Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 295 P.3d 239 (2013), where the Supreme Court held that, in the context of a first party lawsuit alleging bad faith handling and processing of a first party claim (other than UIM) there is a presumption of no attorney-client privilege! Cedell has since been extended to a third-party liability claims scenario.

However, not all is doom and gloom. For example, our Supreme Court recently pleasantly surprised the insurance bar and held that a violation of Washington Administrative Code (“WAC”) regulations alone does not support a cause of action under IFCA. Perez-Crisantos v. State Farm Fire and Casualty Co., 187 Wn.2d 669, 389 P.3d 476 (2017). Also, “procedural” bad faith does not, of itself, result in coverage by estoppel. St. Paul Fire and Marine Ins. Co. v. Onvia, Inc., 165 Wash.2d 122, 196 P.3d 664 (2008). In addition, under long standing precedent, Washington insurers are not required to appoint Cumis counsel when defending under a reservation of rights. Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 715 P.2d 1133 (1986).

Moreover, it is still the general rule in Washington that, when dealing with covered and non-covered claims, an insurer has a duty to defend only the covered claims, so long as it is able to establish a reasonable means of apportioning the defense costs. Waite v. Aetna Cas. & Sur. Co., 77 Wn.2d 850, 467 P.2d 847 (1970). However, the insurer has the difficult burden to carefully segregate between covered and non-covered defense costs. See Prudential Prop. & Cas. Ins. Co. v. Lawrence, 45 Wn. App. 111, 724 P.2d 418 (1986). Absent bad faith, an insurer defending under a reservation of rights is not automatically liable to pay an entire settlement amount irrespective of coverage. Mut. of Enumclaw Ins. Co. v. Dan Paulson Const., Inc., 161 Wn.2d 903, 169 P.3d 1 (2007).

Also of benefit to insurers, perhaps to counterbalance Alea, in Grange Ins. Ass’n v. Roberts, 179 Wn. App. 739, 320 P.3d 77 (2013), review denied, 180 Wn.2d 1026 (2014), the court held that persuasive authority from other jurisdictions could be considered to support a denial of defense where Washington has not yet recognized a particular claim for relief.

Washington federal district courts are more balanced in their analysis of what constitutes insurance bad faith than state courts. For example, in Bayley Const. v. Great Am. E & S Ins. Co., 980 F.Supp.2d 1281 (2013), the court held that the insurer had breached the duty to defend but determined that issues of fact remained on whether the denial of defense was in bad faith. See also King Cty. v. Travelers Indem. Co., 2017 WL 553275, at *7 (W.D. Wash. Feb. 10, 2017) (rejecting insured’s argument that “the Court should apply a per se rule that any insurer who breaches its duty to defend is liable for bad faith” under Alea).

Finally, insurers have had success in opposing stipulated settlements where the settlements were not the product of good faith arm’s length negotiations. See Water’s Edge Homeowners Ass’n v. Water’s Edge Assocs., 152 Wn. App. 572, 216 P.3d 1110 (2009) (reasonable value of stipulated settlement reduced from $8.75 million to $400,000); Aspen Grove Owners Ass’n v. Park Promenade Apartments, LLC et al., 842 F. Supp. 2d 1298 (2012) ($5.75 million stipulated settlement reduced to $1.9 million).

No, the weather in Washington really is not as bad as everyone says. Yes, it does rain a lot but we natives have learned to trust our Gore-Tex raingear. But unfortunately, yes, the coverage landscape for insurers in Washington is as bleak as reputed and there is no Gore-Tex in sight.

Steven Soha is a graduate of the University of Washington, receiving his B.A. in English and Philosophy in 1973. He obtained his J.D., magna cum laude, in 1979 from Seattle University Law School, where he was Editor in Chief of the Law Review. He has authored several Law Review articles, and has co-authored several chapters of the LexisNexis Practice Guide: Washington Insurance Litigation.

Mr. Soha’s practice focuses on all aspects of insurance law, emphasizing complex insurance coverage claims and litigation. He has litigated and advised insurance companies regarding complex insurance coverage disputes in Washington, Oregon, Idaho, Alaska, Montana, Colorado and California. Mr. Soha is licensed to practice in Washington, Alaska and Oregon.

In addition to the practice of law, Mr. Soha’s interests include skiing, hiking and climbing, the study of history, religion and philosophy, and working with Special Olympics.

Paul Rosner, J.D., CPCU, has worked in the property and casualty field since 1989. He is a former casualty adjuster, large loss property adjuster, claims supervisor, and claims manager. In 2005, he received his J.D., summa cum laude, from Southwestern Law School, where he served as Lead Articles Editor for the Southwestern Law Review. As an attorney, he focuses his practice on property and casualty insurance coverage and bad faith litigation in both Washington and Oregon. He has also served as an expert witness on insurance bad faith and claims handling.

Paul earned the designation of Chartered Property Casualty Underwriter (CPCU) in 2008. Since then, he has been an active member of the CPCU Society both locally and nationally. He served as President of the Pacific Northwest (Seattle) Chapter and is currently Chair of the CPCU Society’s Coverage, Litigators, Educators, & Witnesses (CLEW) Interest Group.

Paul is also an active member of the Claims & Litigation Management Alliance (CLM). He has served as President of the Seattle CLM Chapter, CLM’s State Co-Chair, and Education Director.

Paul is a frequent author and lecturer on insurance coverage and bad faith issues including chapter co-author for the Washington Motor Vehicle Accident Insurance Deskbook (2008 Supplement), co-author of the Oregon and Washington chapters of “Insurance Bad Faith, A Compendium of State Law” (2010 and 2015 Editions), and co-author of Chapter 8, “Insurance-Specific Issues in Coverage and Bad-Faith Litigation” in “Washington Insurance Litigation Practice Guide” (2014-2015 Edition). He is a regular contributor to the Soha & Lang, P.S. Coverage Blog and the Around the Nation column of Claims Management Magazine. His lectures include presentations to attorneys and insurance professionals.

When not practicing law Paul enjoys spending time with his family, running, hiking, camping, and mountain biking.