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Claims Adjusters Or Lawyers? Federal Court Sees No Difference. – Insurance Laws and Products



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An insurance company’s duty of good faith and fair dealing
is incorporated into every insurance policy. Generally speaking,
the duty requires an insurance company to act fairly toward its
insured and not place its own interests above the insured’s
interests, whether in the context of an insured’s claim for
first-party benefits (i.e., a claim for damages to the
insured’s home) or where the insured has been sued by a third
party. In the third-party scenario, the insured requests the
insurance company defend the insured against the
third-party’s claim and indemnify the insured for any
resulting damages, whether through a settlement or judgment, up to
any applicable policy limits. The insurance company may be held
liable for breaching its duty of good faith and fair dealing (or,
stated differently, committing “bad faith”) if it
declines to honor its contractual promises to the insured without
any reasonable basis.

In recent years, insureds have sought to broaden “bad
faith” claims against insurance companies in a variety of
situations. Unsurprisingly, some courts have taken expansive views
on when and under what circumstances an insurance company can
commit bad faith, often with far-reaching implications for
insurance companies that may require seismic changes to the way
they operate.

A recent decision by the District Court for the Eastern District
of Washington is the latest example of this ever-expanding view of
“bad faith” and the duties it imposes. Security
Nat’l Ins. Co. v. Construction Assocs. of Spokane
, 2022
WL 884911 (E.D. Wash. March 24, 2022). Although the facts are
complicated, the case involved a request that the insurance
company, Security National, provide a defense to the general
contractor, that hired Security National’s insured as a
subcontractor, against claims in a lawsuit filed by one of the
subcontractor’s employees. The general contractor tendered
the defense of this lawsuit to Security National, citing a
certificate of insurance naming the general contractor as an
additional insured under the Security National policy.

In October 2019, after receiving the general contractor’s
tender of defense, Security National denied its request. Security
National advised the general contractor that the certificate of
insurance “confer[ed] no rights” and “was
produced for information” only. Security National took the
position the certificate of insurance did not change the policy and
there was no endorsement granting coverage to the general
contractor. At the time of the denial, Security National’s
adjusters were unaware of the Washington Supreme Court’s
decision in T-Mobile USA Inc. v. Selective Ins. Co. of
Am.
, 450 P.3d 150, handed down on October 10, 2019. That
decision addressed the issue of whether an insurance company may be
bound by an agent’s representations regarding certificates of
insurance, an issue of great importance for Security
National’s duty to defend the general contractor.

Ultimately, Security National filed a declaratory judgment
action against the general contractor, seeking a ruling that it
owed no defense or indemnity in the underlying case. After taking
an assignment of the general contractor’s claims, the injured
worker counterclaimed against Security National for, among other
things, breach of contract, coverage by estoppel, and breach of the
duty of good faith and fair dealing. The parties filed
cross-motions for summary judgment on whether Security National
breached its duty to defend and whether it did so in “bad
faith.”

The court concluded Security National “acted in bad faith
as a matter of law.” Displeased with Security National
adjusters’ investigation at the time it made its decision to
reject the general contractor’s tender of defense, the court
reasoned Security National’s adjusters had an affirmative
obligation to survey the legal landscape in Washington to avoid
missing a decision the court described as a
“blockbuster”:

True, the adjusters are not attorneys in Washington and are
presumably not trained in the same kinds of legal research
techniques as lawyers. But that does not excuse an adjuster from
having at least a baseline understanding of the relevant
state’s law necessary to carry out their duties. Instead, it
means insurance companies must undertake what in practice are
reasonably small steps to ensure adjusters are equipped to make
reasonable coverage and defense determinations. Such steps could
include teaching adjusters to run case searches or, more likely,
supplying adjusters with subscriptions to relevant legal
newsletters, a resource most attorneys rely on to keep apprised of
legal developments. Regardless, ignorance of the applicable case
law, even of relatively new case law, does not excuse the conduct
of adjusters who deny defense or indemnification. Doing otherwise
would allow insurance carriers to intentionally stay ignorant and
hide behind their ignorance when their claim denials are
challenged. Adjusters must equip themselves or else seek out those
with the requisite tools and knowledge.

Stated differently, the court held insurance companies that
employ adjusters without ensuring their adjusters stay current on
legal developments in whatever states they operate do so at their
own peril.

The Security National decision highlights the
importance for insurance companies to seek advice from qualified
coverage counsel before making a coverage determination. Our
seasoned lawyers are available and can be reached at
414-273-1300.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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