Insurance Bad Faith Liability Expands and Adjusters and Insurance Companies Should Pay Attention
Jeff Bone | April 2, 2018
The State of Washington has a reputation for being fairly plaintiff-friendly when it comes to insurance coverage litigation. That reputation will likely grow in light of a recent decision from the state Court of Appeals. In Keodalah v. Allstate Ins. Co., No. 75731-8-I (filed Mar. 26, 2018), Division I of the Court of Appeals (based in Seattle) reversed a decision of the trial court and held that individual insurance adjusters may be liable for bad faith and violation of the Consumer Protection Act (CPA) under RCW ch. 19.86 in connection with their handling of an insured’s claims. As discussed below, the decision (one of first impression in Washington), could have far reaching implications for the insurance industry and in coverage litigation in Washington.
Keodalah began as a routine underinsured motorist (UIM) case. The plaintiff and a motorcyclist collided in April 2007. The police report, several witnesses, and Allstate’s own accident reconstruction firm indicated that: (i) plaintiff was not on his cell phone at the time of the accident; (ii) plaintiff had stopped at a stop sign before proceeding into the intersection; and (iii) the motorcyclist was traveling between 60 and 74 mph when it sped through the intersection, causing the collision. The motorcyclist, who was killed in the accident, was uninsured. Plaintiff asked his insurance company, Allstate, to pay the $25,000 limit of his UIM policy. Allstate refused and instead offered to pay $1,600, claiming the plaintiff was 70% at fault. After Allstate only minimally increased its offer, plaintiff filed suit.
During discovery, Allstate designated the adjuster who handled plaintiff’s claim as a 30(b)(6) witness. According to the Court, although Allstate had the police report and the analysis from the accident reconstruction firm, the adjuster initially testified that the plaintiff had run the stop sign and been using his cell phone, before later admitting that neither was correct. Allstate still refused to pay the UIM limit, and the case went to trial, where the jury awarded plaintiff over $100,000 in damages.
Plaintiff thereafter filed a second lawsuit against Allstate and the adjuster who had testified in the prior case asserting claims for insurance bad faith and violation of the CPA. The trial court dismissed the claims against the adjuster, but certified the case for discretionary review on the issues of whether an individual insurance adjuster could be liable for bad faith and violation of the CPA. 
The Court of Appeals reversed. On the bad faith claim, the Court noted that RCW 48.01.030 imposes a duty of good faith on “all persons” involved in insurance, and that RCW 48.010.070 defines “person” to include “any individual.” The Court held that the adjuster was engaged in the business of insurance and acting as Allstate’s representative, and thus had a duty to act in good faith, the breach of which could subject her to suit. The Court also held that the fact that the adjuster was acting within the scope of her employment by Allstate did not change the result – while under Washington law, an employee is subject to personal liability to a third party only for breaching a duty owed to that third part, the Court held that RCW 48.01.030 imposes just such a duty by mentioning “all persons.”
The Court also declined to address the apparent fact that the sole basis for the claim against the adjuster was her participation in the prior litigation, despite fairly clear Washington law that “witnesses in judicial proceedings are absolutely immune from suit founded on their testimony.” See Wynn v. Earin, 163 Wash. 2d 361, 369–70, 181 P.3d 806, 810 (2008). Nor did it address the fact that the sole basis for its decision was the apparent fact that the adjuster gave testimony as a corporate representative, not in her individual capacity.
On the CPA claim, the Court noted that it had previously held in Int’l Ultimate, Inc. v. St. Paul Fire Ins. & Marine Ins. Co., 122 Wash. App. 736, 87 P.3d 774 (2004), that (i) CPA liability required a contractual relationship between the parties, and (ii) that an insured could not sue an insurer’s adjuster because the CPA did not contemplate suits against employees of insurers. However, the Court reasoned that a more recent Supreme Court decision, Panang v. Farmers Ins. Co. of Wash., 166 Wn.2d 27, 204 P.3d 885 (2009), had expressly held that the CPA does not require proof of a consumer relationship. It therefore declined to follow Int’l Ultimate. The Court notably did not find that the secondary holding in Int’l Ultimate regarding the applicability of the CPA (i.e., that it does not contemplate suits against employees of insurers) was inconsistent with any subsequent Supreme Court cases. It simply disregarded Int’l Ultimate in its entirety and found that an adjuster can be subject to CPA liability without further discussion.
Keodalah’s Potential Impact
It is entirely possible that, if the case ends up back in the trial court, the adjuster will escape liability. As noted, the Court expressly declined to address whether the adjuster could be liable solely for conduct that occurred in litigation. If the trial court follows the general rule noted above, that should result in immunity for the adjuster in this particular case (although the situation faced by the adjuster should make counsel defending coverage cases think carefully about who to offer up as a representative for Rule 30(b)(6) purposes).
However, the underlying rationale of the Court’s holding in Keodalah is not limited to situations in which an adjuster provides testimony. The decision could accordingly have major ramifications for the insurance industry and future coverage litigation by enabling plaintiffs bringing bad faith/CPA claims related to coverage decisions to add as defendants any insurance company employees who played any role in the coverage decision. This could have a number of effects:
- First, it could enable plaintiffs to keep insurance companies (many of whom are not Washington citizens) from removing coverage cases to federal court on the basis of diversity (if the plaintiff can find an adjuster or some other employee involved in the coverage decision who resides in Washington).
- Second, it could drive up costs in a particular litigation, particularly if an adjuster has to retain separate counsel to defend against the claim.
- Third, it could change the structure of employment agreements between adjusters and the insurance company, as adjusters will be heavily incentivized to negotiate clauses in which the company agrees to indemnify him or her from bad faith/CPA claims arising from their employment activities.
Given the importance of the case, the fact that the decision dealt with a matter of first impression, and some of the curious omissions from the Court’s opinion noted above, it would not be surprising to see this matter before our state Supreme Court. In the meantime (or if the Supreme Court declines review), the insurance industry and those who litigate coverage actions in Washington should be prepared for a potentially dramatic impact in their business and practices.
 Slip opn. at 2.
 Id.at 2-3.
 Id. at 3.
 Plaintiff also asserted a claim for violation of the Insurance Fair Conduct Act (“IFCA”), which the trial court also dismissed and certified to the Court of Appeals. Before the Court of Appeals could issue its opinion, the Supreme Court held that IFCA does not create a private cause of action for violation of a regulation. See Perez-Crisantos v. State Farm Fire & Casualty Ins. Co., 187 Wn.2d 669, 672 (2017). Accordingly, the Court of Appeals did not address the IFCA portion of the Plaintiff’s appeal.
 Id. at 5.
 The Court was arguably playing a bit loosely with the statutory language in this regard (although, to be fair, prior decisions from the Western District of Washington and Division III of the Court of Appeals appear to have done the same thing regarding claims against corporate adjusters – see Slip Opn. at 5-6). While the statute initially says that “all persons” must be actuated by good faith, it goes on to state that this duty rests “[u]pon the insurer, the insured, their providers, and their representatives.” Thus, the Court’s focus arguably should have rested on the definition of “representatives,” not persons. That is certainly the term the parties focused on in their briefs. Moreover, it is clear that the administrative regulations implementing the statute do not include individual employees within the scope of the definition of “representatives” – a fact the Court of Appeals agreed with in its opinion. See id. at 9.
 The Court mentioned in a footnote that it had not accepted discretionary review on this issue, which is curious. Courts generally decide cases on all the fact before them, not on abstract legal questions. The Court’s footnote thus raises the question of whether the decision is an impermissible advisory opinion. See Walker v. Munro, 124 Wash. 2d 402, 418, 879 P.2d 920, 929 (1994).
 Id. at 11-12.
 Id. at 12.