Start Sweating the Small Stuff

On March 26, 2018, the Washington State Court of Appeals held in a published and binding decision that an individual insurance claims professional may be liable for bad faith and Consumer Protection Act violations. This is a first decision of its kind in Washington, and could affect the national legal landscape of claims professional evaluations. The facts of the case provide a roadmap as to how the court came to its decision.

On April 2, 2007, Moun Keodalah was driving his truck and came to a complete stop at a stop sign. As he began to cross the intersecting street, a motorcyclist crashed into the right side of Keodalah’s vehicle. The crash injured Keodalah and killed the motorcyclist. Police arrived and conducted an investigation of the fatal crash, concluding that the motorcyclist was traveling between 70-74 mph in a 30-mph zone, and that excessive speed caused the crash. Investigators also concluded the Keodalah had come to a complete stop and had not been on a cellphone at the time of the crash. No charge or traffic citation was issued to Keodalah.

Soon after, Keodalah reported the crash to his insurer, Allstate Insurance Company. The first claims professional handling the loss interviewed eyewitnesses of the crash, who all said that they believed the motorcyclist was driving between 75-80 mph and was the cause of the crash. A second claims professional reviewed the claim and acknowledged that one of the eyewitnesses stated that the motorcyclist “cheated” at the intersection to get to the front of the line and exceeded 70 mph.

The claims professional recommended that Allstate hire an accident reconstructionist to assist in determining liability, which Allstate did. On Aug. 17, 2007, the reconstruction company issued its analysis of the crash, concluding that Keodalah stopped at the stop sign, the motorcyclist was traveling in excess of 60 mph, and that the motorcyclist’s excessive speed caused the crash.

Facts of the Case

Keodalah submitted an underinsured motorists (UIM) claim on April 8, 2008, because the motorcyclist was uninsured. He requested that Allstate pay his $25,000 UIM policy limits. Three months later, on July 11, 2008, Allstate sent Keodalah’s attorney a letter stating that it found Keodalah to be 70 percent at fault for the crash and offered $1,600 to resolve his UIM claim. Keodalah’s attorney sent written requests to Allstate inquiring how Allstate determined Keodalah was at fault but received no explanatory response from the insurer. Allstate did, however, send a letter to Keodalah increasing its offer to $5,000 to resolve the UIM claim.

On June 24, 2009, Keodalah’s attorney filed an Insurance Fair Conduct Act (IFCA) notice with the Washington State Office of the Insurance Commissioner and copied Allstate. The notice provided Allstate with Keodalah’s basis for filing a lawsuit under IFCA.

Three years later, Keodalah filed a UIM complaint in King County District Court. Allstate filed an answer to his complaint denying liability, and asserted comparative fault. Keodalah served discovery on Allstate on Oct. 19, 2012, with Allstate’s third claims professional, Tracey Smith, providing written answers to the discovery requests. Allstate responded that Keodalah failed to stop at the stop sign and was at fault, even though it acknowledged that it had reviewed the police report that concluded Keodalah had stopped appropriately and that the motorcyclist was at fault.

On Feb. 28, 2013, Allstate designated Smith as its CR 30(b)(6) representative for deposition. Smith testified that she did not know when Allstate had made its liability decision or when it determined the value of Keodalah’s claim. She also gave conflicting testimony about Keodalah running the stop sign and being on his cellphone at the time of the crash.

In March 2013, Allstate offered Keodalah $15,000 to settle his UIM claim. Keodalah rejected the offer and requested the $25,000 policy limits to resolve the claim. Allstate declined the request and the case proceeded to trial in March 2014.

At trial, Smith testified to the jury that Keodalah was 70 percent at fault and that she and Allstate had relied on eyewitness statements, the police report, and the accident reconstruction company’s report to support the finding. She also testified that Keodalah was on the cellphone at the time of the crash.

On cross-examination, Smith conceded that the accident reconstruction company’s report did not support the comparative fault finding. She also conceded that when Allstate alleged that Keodalah failed to stop, they knew the statement was not true, and that Allstate changed its position from failure to stop to failure to yield in litigation because another attorney reviewed the case on behalf of Allstate. Smith also testified that Allstate declined to change its position that Keodalah was on his cellphone despite learning that he had not been on his phone.

On March 15, 2014, the jury returned a verdict finding the motorcyclist 100 percent at fault. The jury awarded Keodalah damages in the amount of $108,868.20. The court’s jurisdictional limits in 2014 were $75,000. The court entered judgment on the jury verdict on May 19, 2014 for $25,302.95.

Bad-Faith Litigation

On Aug. 4, 2015, Keodalah filed a complaint against Allstate Insurance Company and Smith in King County Superior Court. He alleged bad faith and Consumer Protection Act claims against Smith and Allstate, and an IFCA claim against Allstate.

Allstate and Smith then moved the court to dismiss Keodalah’s claims against Smith on the basis that Washington law did not permit bad faith or Consumer Protection Act claims against individual, employee claims professionals. They relied on two separate rationales: First, if the claims professional was acting within the scope of her employment, then she could not be sued individually, and there were no alleged facts that Smith was not acting within the scope of her employment; and second, the state’s claims handling laws and regulations applied to “insurers,” not individual employees.

Keodalah opposed the motion to dismiss and generally contended that the legislature broadly established its insurance industry oversight in Title 48 of the Revised Code of Washington: “All insurance and insurance transactions in this state, or affecting subjects locally, wholly, or in part or to be performed within this state, and all persons having to do therewith are governed by [Title 48].” (Author’s emphasis.)

Keodalah then focused on the section of Title 48 relating the duty of good faith: “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.” (Author’s emphasis.) Keodalah maintained that the statute’s plain language provided the cause of action against Smith. He also argued he had a viable Consumer Protection Act claim against Smith because an insurance bad-faith violation constituted a per se Consumer Protection Act violation.

The trial court granted the motion to dismiss as to Keodalah’s claims against Smith, but also determined that the claims against Smith involved controlling questions of law of which there is a substantial ground for difference of opinion, and immediate review of the order may materially advance the ultimate termination of litigation. Accordingly, the court certified for discretionary review inter alia, whether Keodalah can state a claim against Smith for matters alleged in the bad-faith complaint.

Court of Appeals Decision

Keodalah appealed the court’s order by asserting that the trial court erred when it dismissed his bad-faith and Consumer Protection Act claims against Smith. He argued that the statutory language of Revised Code of Washington 48.01.030 unambiguously imposes a good-faith duty on individual, employee claims professionals and that a court must give an undefined term its plain and ordinary meaning unless a contrary legislative intent is indicated. Keodalah cited texts from the American Institute for Chartered Property Casualty Adjusters and the Insurance Institute of America that state a claims representative—the person that “investigate[s] the facts of specific claims to determine coverage, legal liability, damages, and reserves”—is the person and employee responsible for fulfilling the insurance company’s promise to its insured.

Keodalah also directed the court to consider two other state courts—Montana and West Virginia—that have held individual, employee claims professionals may be personally liable based on similar language. In 1993, the Montana Supreme Court, in O’Fallon v. Farmers Ins. Exch., decided that individual, employee claims professionals could be held personally liable for violating Mont. Code Ann. § 33-18-201, which prohibits unfair claims settlement practices. In so holding, the O’Fallon court first noted that 33-18-201 stated “no person” can engage in the statute’s forbidden conduct.

Likewise, in Taylor v. Nationwide Mutual Insurance Co., the West Virginia Supreme Court of Appeals held “that a cause of action exists in West Virginia to hold a claims [professional] employed by an insurance company personally liable for violations of the West Virginia Unfair Trade Practices Act.”

Allstate and Smith contended that no Washington court has held that an individual claims professional can be personally liable for bad faith or breach of the Consumer Protection Act just because of signing discovery responses or testifying at a deposition or trial. They also argued that the statutory language of “representative”—one that represents another as agent, deputy, substitute, or delegate—did not mean imposition of personal liability against an individual employee.

The Court of Appeals found Keodalah’s statutory argument more persuasive. The court noted that the insurance code’s broad definition of “person” included both individuals and corporations and did not make any distinction between the duties they owed. It found the duty of good faith applies equally to individuals and corporations acting as insurance claims professionals. The court said that while the insurance administrative regulations focus in particular on insurers, the insurance code, Title 48, is broader and expressly applies to “all persons” having to do with insurance transactions.

The court dismissed Smith’s claim that she cannot be liable since she was acting within the scope of her employer because she, as a person involved in Keodalah’s claim, owed him a duty of good faith and could not avoid personal liability for bad faith on the basis of employment. The court also found that Smith could be personally liable for violation of the Consumer Protection Act. The court then remanded the case back to the trial court for further litigation of Keodalah’s bad faith and Consumer Protection Act claims against Allstate and Smith.

Reverberating Repercussions

Keodalah could have major ramifications for the entire insurance industry. If more than one claims professional is involved in any way in reviewing, assessing, collecting information, and evaluating a claim, then each one could be added as an individual defendant in a bad-faith suit. This may create conflict of interests between the company and individual employees who are evaluating the claims, which would require separate counsel for each defendant claims professional.

In cases where there are multiple individual defendants, the costs of litigation go up exponentially, especially during discovery where there are depositions and multiple written requests to respond to. It may also change the employment agreements between the insurance company and claims professionals wherein claims professionals would seek indemnification from the company for individual acts arising out of the claims professional’s activities.

A practical effect of Keodalah is a huge exception to the doctrine of respondeat superior—the doctrine that a party is responsible for (has vicarious liability for) acts of their agents—as it applies to first-party, bad-faith litigation. It may also affect the attorney-client relationship between coverage counsel and all persons involved with the insurance company.

Another potential impact is that foreign insurers employing a state’s claims professionals could likely be sued in state court without removal to federal court, since federal courts normally have diversity in insurance disputes where all of the parties are residents of different states. If a plaintiff locates one claims professional who was involved in a claim in that state, diversity would be destroyed and the federal court would remand the case back to state court.

Preventative Measures

What can be done to prevent individual claim representative liability? Begin with a thorough and complete collection, review, and documentation of all information relevant to the claim. Institute a double-check policy and audit claims files involving first-party claims. Conduct periodic training on new statutes and case laws. Immediately flag anything regarding allegations of bad faith. Ensure that a complete evaluation analysis is based on documents and information, not opinions or assumptions, and don’t be afraid to update and review the evaluation based on new or more complete information.

Additionally, ensure timely follow up and transparency with policyholders by updating them on the claim’s status. Adhere strictly to claim manuals and policies, and verify the amounts offered are consistent with liability and damage information.

Conducting roundtables with your team can prevent claims professionals from missing the significance of relevant information. Companies should also consider errors and omissions insurance, as such policies are designed to cover financial losses resulting from liability for committing mistakes in the performance of professional duties, which would include those by claims professionals.