Off the Hook

The Washington Supreme Court reversed the Court of Appeals and held that an insurer’s employee adjusters are not subject to personal liability for insurance bad faith or Consumer Protection Act (CPA) claims.

In the underlying case, Keodalah v. Allstate Insurance Company, plaintiff Moun Keodalah was involved in an accident with a motorcyclist. Allstate claimed it found Keodalah to be 70 percent at fault for the accident, with the insurer’s adjuster stating that Keodalah ran a stop sign and was on his cellphone at the time of the accident. The adjuster later admitted neither was the case, and a jury awarded Keodalah nearly $109,000. Keodalah filed a second lawsuit, though, with claims against the adjuster, Tracey Smith.

At issue in Keodalah was whether RCW 48.01.030 provides a basis for an insured’s bad-faith claim and a CPA claim against an insurer’s employee adjuster. Keodalah argued that the plain language found in RCW 48.01.030 imposes a duty on “all persons,” and therefore subjects employee adjusters to bad faith and CPA claims premised on breach of the noted statutory duty.

Smith argued that not every duty imposed by a statute is an actionable tort, that RCW 48.01.030 does not expressly create a private right of action, and that the appellate court did not employ the three-pronged test articulated in Bennett v. Hardy for determining whether a statute includes an implied cause of action.

That test includes whether the plaintiff belongs to a class the statute was intended to benefit, whether legislative intent supports creating or denying a remedy, and whether implying a remedy is consistent with the underlying purpose of the legislation.

The Court of Appeals stated that the relevant statute “imposes a duty of good faith on ‘all persons’ involved in insurance,” including the insurer and its representatives.” The court said that the adjuster “was engaged in the business of insurance and was acting as an Allstate representative. Thus, under the plain language of the statute, she had the duty to act in good faith. And she can be sued for breaching this duty.”

The Court of Appeals further held that Keodalah need not show the existence of a contractual relationship with the adjuster to establish a CPA claim. “We hold that an individual employee insurance adjuster can be liable for bad faith and a violation of the CPA.”

The Washington Supreme Court, though, agreed with Smith in a five-to-four decision, finding that RCW 48.01.030 does not create an implied cause of action for insurance bad faith. In analyzing this issue, the Supreme Court looked to the “entire context of the statute in which the provision is found, as well as related provisions, amendments to the provision, and the statutory scheme as a whole.”

The court reasoned that the interest addressed in RCW 48.01.030 is expressly stated to be the “public interest,” and the statute indicates that its purpose is to protect the “integrity of insurance.” Thus, the court concluded that it cannot be said that the statute was enacted for the particular benefit of insureds, and therefore the first Bennett factor does not support finding an implied cause of action for a violation of RCW 48.01.030.

Further, after analyzing the relevant statutory and historical contexts, the court noted that RCW 48.01.030 may properly be read as a broad statement of public policy supporting specific provisions of the insurance code, not as an additional and separate statutory cause of action. The court noted that if it was to read the statute to imply a cause of action by the statute’s plain language, such implied cause of action would apply against insureds as well. Thus, the court concluded the provision of such a broad inferred cause of action subjecting every person and entity listed in RCW 48.01.030 to liability would not be consistent with the legislature’s purpose in enacting the statute.

Smith also did not owe Keodalah a duty under WAC284-30-330(2),(4), (6), (7), (8) and (13). The court held this regulation defines only unfair acts or practices of the insurer. Thus, because Smith was not the insurer, Keodalah cannot seek to enforce the regulation against Smith.

Further, while Keodalah contended that a breach of the good-faith duty that RCW 48.01.030 imposes on employee adjusters subjects them to CPA liability, the court held that such claims fail because, just as the court has limited bad faith tort claims to the context of the insurer-insured relationship, so has it limited CPA claims based on breach of the statutory duty of good faith. The court cited previous opinions in which it has been well established that “only an insured may bring a CPA claim for an insurer’s breach of its statutory duty of good faith.” Thus, Keodalah, as the insured, can sue insurer Allstate, but he cannot also sue Smith, the insurer’s employee.

The previous Court of Appeals decision, which was overturned here, reflects a national trend of joining individuals as defendants in lawsuits for bad faith against insurers in order to prevent insurers from removing cases to federal courts by finding a non-diverse defendant, such as the insurer’s local adjuster, agent, or attorney. The lengthy dissent in the Supreme Court decision agreed with the majority that RCW 48.01.030 does not imply a statutory cause of action for insurance bad faith. However, the dissent would have reinstated Keodalah’s claims for per se violations of the CPA, and supported his cause of action for common law insurance bad faith against Smith not addressed in the majority decision.