Inherent in every contract, there exists a duty of good faith and fair dealing. In the late 1950's and early 1960's, this duty of good faith and fair dealing found its way from contract law into insurance law. The concept became accepted commonly in legal journals and treatises. See: Restatement of Contracts (Second),§ 205 (1981). The changing law lead to a series of California decisions extending the above theory to an insurance contract context. California took the lead in expanding this concept and applying it to insurance contract relationships.
California courts allowed a policyholder to sue a defendant’s insurance company for the insurer’s breach of the duty of good faith. In Brown v. Guarantee Insurance Co., 319 P.2d 69 (Cal.App. - 1957), the California Court of Appeals stated that:
If an insurer undertakes to defend the insured and enters into settlement negotiations, then the insurer owes a duty of good faith to the insured.
In Comunale v. Traders & General Insurance Co., 328 P.2d 198 (1958), the California Supreme Court stated that the insurance company:
Breached an implied covenant of good faith and fair dealing when the insurer did not consider the insured’s interest and compromised the position of the insured by entering into a settlement within the policy limits.
The court in Comunale still considered the implied duty of good faith to arise from the insurance contract and did not describe the action as the tort of bad faith. However, good faith became the standard by which courts measured the conduct of insurance companies. For example, if an insurance company did not consider the interests of the policyholder in seeking settlement or delayed investigation of the claim or payment of the claim, the insurance company would be liable for bad faith performance of the insurance contract.
In Crisci v. Security Insurance Co., 426 P.2d 173 (1967), the California Supreme Court made the jump from a contract claim to a tort claim. In Crisci, the Court held that breaching the covenant of good faith and fair constituted a tort. After the insurance company refused to settle within policy limits, the case was litigated and the court entered a judgment against the policyholder that exceeded the policy limits. In upholding the policyholder’s action for bad faith, the court stated that liability is imposed against an insurance company who "unwarrantedly refuses an offered settlement where the most reasonable manner of disposing of the claim is by accepting the settlement . . . not for a bad faith breach of the contract but for failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing."
The Crisci decision affirmed the Court’s rationale in Comunale that the duty to settle lies within tort and contract law. The Crisci court awarded the policyholder contractual damages for the excess judgment plus damages for mental suffering. In so doing, the Court established that tort remedies are available for a bad faith breach of the duty to settle. Crisci opened the door to the expanded range of damages found in present bad faith litigation, including those for mental anguish and, in some jurisdictions, punitive damages.
Against this background, bad faith law developed somewhat differently throughout the various states. California continued to allow bad faith claims in a third party insurance context for many years before it adopted in the “majority rule" in the early 1990s disallowing third party claims against an insurance company. Washington, on the other hand, has not allowed third party bad faith claims. 
A.Breach of Contract.
In Washington, a policyholder may sue an insurance company for breach of contract. The claim involves the same elements of contractual breach applicable to other areas of law.
The elements of a breach of contract claim are that the contract that imposes a duty, the duty is breached and the breach proximately causes damage to the plaintiff. Northwest Mfrs. V. Department of Labor, 78 Wn.App. 707, 712, 899 P.2d 6 (1995).
However, Washington courts approach the element of duty in an insurance contract context differently. The duty is dependent upon the type of relationship between an insurance company and its policyholder. In a third party action where the insurance company has reserved its rights, Washington courts have held that there exists a "quasi-fiduciary relationship." In Tank v. State Farm, 105 Wn.2d 381,385-86, 715 P.2d 1133 (1986), the Court stated:
Such a relationship exists not only as a result of the contract between insurer and insured, but because of the high stakes involved for both parties to an insurance contract and the elevated level of trust underlying insureds’ dependence on their insurer... This fiduciary relationship, as the basis of the insurer's duty of good faith, implies more than the "honesty and lawfulness of purpose: which comprises a standard definition of good faith. It implies "a broad obligation of fair dealing", Tyler, at 173 (Tyler v. Grange Ins. Ass'n., 3 Wn.App. 167, 473 P.2d 193 (1970)], and a responsibility to give "equal consideration" to the insured's interests. Tyler, at 177. Thus, an insurer's duty of good faith rises to an even higher level than that of honesty and lawfulness of purpose toward its insureds: an insurer must deal fairly with an insured, giving equal consideration in all matters to the insured's interests.
In a first party situation, the Washington Supreme Court clarified the concept of a quasi-fiduciary duty in a recent case. In Van Noy v. State Farm, 142 Wn.2d 784, 793, 16 P.3d 574 (2001), the Court stated:
The court was also correct when it followed the reference to an insurance company’s “enhanced fiduciary obligation" with the statement that an insurer must “deal fairly with an insured, giving equal consideration in all matters to the insured’s interest as well as its own." [Citation omitted.] The latter statement from the Court of Appeals’ opinion regarding the obligations of an insurer is unassailable because it is essentially a verbatim statement of the fiduciary duty that this court has imposed upon insurers in both first party and third party contexts.
In discussing the duty owed by the insurance company, the Van Noy court reiterated the obligation of good faith owed by the insurance company to a policyholder. This is codified in RCW 48.01.030, which states:
The business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters. Upon the insurer, the insured, their providers and their representatives rests the duty of preserving inviolate the integrity of insurance.
In addition to the above duties, insurance companies are obliged also to comply with regulatory requirements set forth in the Washington Administrative Code (“WAC"), Section 284-30 et seq. Accordingly, there are a myriad number of ways to establish an insurance company’s duty to its policyholder. Case law discusses a number of the duties and conduct that results in a breach. Salois v. Mutual of Omaha, 90 Wn.2d 355, 581 P.2d 1349 (1978), established a per se violation of RCW 19.86.020 – the Consumer Protection Act - by a violation of RCW § 48.30.010, including a failure to comply with any requirement of WAC 284-30 et seq.; Tank v. State Farm, 105 Wn.2d 381, 715 P.2d 1133 (1986),
The policyholder demonstrates a contractual breach of the policyholder’s duty by showing that the insurance company violated the above statutory or regulatory duties or that it violated one or more of the duties imposed upon the company as stated above or in Section I, subpart C. The policyholder has the burden to establish a breach of its duties based upon a preponderance of the evidence.
In addition to the other elements required in a breach of contract action, an policyholder must demonstrate that the insurance company’s conduct caused “harm". Safeco v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992). In Butler at p. 390-91, the plaintiff successfully argued that once a policyholder meets the burden of establishing bad faith, the court may impose a rebuttable presumption that “harm" has occurred. The “harm" necessary may include prejudice to the policyholder’s defense or a failure to investigate that deprived the policyholder of the full benefit of the insurance contract. Coventry, supra at p. 283.
Contract damages are limited to “benefit of the bargain" damages. In an insurance context, this usually means that the insurance company is obligated to put the policyholder in the same position as if the insurance company had provided coverage or had indemnified the policyholder. Generally, courts have also allowed a policyholder to recover the attorney’s fees incurred to defend an action where a defense was wrongfully denied.
Also, in a situation where an insurance company fails to accept the defense or obligation to indemnify a policyholder, Washington courts have extended the right to recover attorney’s fees if the insurance company’s decision was wrong. Olympic Steamship v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673 (1991); most recently upheld in Ellis Ct. Apts. v. State Farm, 117 Wn.App. 807 (May 2003).
There is one advantage to a common law contract claim over a CPA claim or bad faith claim. The statute of limitations for a breach of the insurance policy is six years under RCW § 4.16.040. Actions under the Washington CPA are subject to a four-year statute of limitation. RCW § 19.86.120. Bad faith and fair dealing claims are subject to a three-year limitation statute. RCW § 4.16.080.
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