Insurer's Failure to Act in Good Faith in Defending Subject to a Reservation of Rights

Posted Tuesday, April 04, 2017 by Ed Harper

Insurer’s Failure to Act in Good Faith in Defending Subject to a Reservation of Rights

Washington Pattern Instruction 320.03 states: “An insurer who, under a reservation of rights, defends the claim, and owes a duty of good faith to its insured. This duty requires the insurer to: - thoroughly investigate the liability and damage issues related to the claim; or - retain competent defense counsel, recognize that the defense counsel represents only the insured and not the insurer, and act accordingly; or - fully inform the insured that the insurer is defending the case subject to a reservation of rights; or- fully inform the insured of all developments relevant to the policy coverage and the progress of the claim against the insured; and - refrain from conduct to demonstrate a greater concern for the insurer’s financial interest then for the insured’s financial interests.

An insurer who fails to fulfill this duty and/or any of these duties fails to act in good faith.”

With Safeco v. Butler, 118 Wn.2nd 383, 820 P.2nd 499 (1992), delineates when an insurance company fails to protect its insured’s interests when utilizing a reservation of rights. In Butler the insured, Hap Butler, took off after several delinquents who had destroyed his mailbox. He ran into his house grabbed 2 loaded handguns and got in his car. He chased the delinquents through the streets of Spanaway.

Butler claimed he a saw flash coming from the truck holding the delinquents and believed someone in the truck was shooting at them. Butler shot back and injured Eddie Zenker in the head. A civil suit ensued with Zenker suing Butler for his injuries.

Safeco had an insurance policy to defend Hap Butler. “An insurer’s duty to defend the insured is one of the main benefits of the insurance contract.” (Cite omitted) The insurer who accepts that duty under a reservation of rights, but then performs the duty in bad faith, is no less liable than the insurer who accepts but later rejects the duty. (Butler at 392) The court has articulated an insurer must give equal consideration to its insured. (Cites omitted) In the case of Tank v. State Farm Fire and Casualty Company 105 Wn. 2nd 381, 715 P.2nd 1133 (1986) the language is clear that the fiduciary relationship between an insurer and an insured is not a true fiduciary relationship. Tank holds that an insurer must give equal consideration to the insured’s interests. However under a true fiduciary relationship, the insurer would have to place the insured’s interests above its own. (Butler at 389)

Safeco had raised a motion for summary judgment which had been denied at the trial court level. The Supreme Court of Washington determined that Safeco had possibly acted in bad faith, and disputed as a material fact that precluded Safeco’s motion for summary judgment.

“To summarize our holding so far: we hold (1) harm is an essential element of an action for an insurer’s bad faith handling of a claim under a reservation of rights; (2) if the insured shows by a preponderance of the evidence the insurer acted in bad faith, there is a presumption of harm; (3) the insurer can rebut the presumption by showing by a preponderance of the evidence its actions did not harm or prejudice the insured closed; and (4) if the insured prevails on the bad faith claim the insurer is stopped from denying coverage.” (Butler at 394) Here the court sided with the insured Butler, who was presumably prejudiced and remained at trial on whether Safeco acted in bad faith.

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