Bad Faith Claims
In Insurance Coverage Disputes

by Charles H. Van Gorder

Table of Contents

I.INTRODUCTION 1

II.IMPACT OF BAD FAITH/CONSUMER PROTECTION CLAIMS 2

A.Enhanced Discovery 2
B.Estoppel on Policy Defenses 4

III.BAD FAITH CLAIMS 7

A.Basis of Bad Faith 7
B.Harm is an Element 7
C.Questions of Fact 8
D.Reservation of Rights 9
E.Failure to Settle 10
F.Other Considerations 12

IV.CONSUMER PROTECTION CLAIMS 12

A.Unfair or Deceptive Act or Practice 13
1.Per Se Unfair Trade Practice 13
2.Non?Per Se Violation 15
B.Occurring in Trade or Commerce 15
C.Public Interest Impact 16
D.Injury to Plaintiff 16
E.Causation 17
F.Other CPA Considerations 17
1.Liberal interpretation of Consumer
Protection Act 17
2.Standing 18
3.Severence and scope of potential liability 19

V.BAD FAITH/CONSUMER PROTECTION VIOLATIONS 19

VI.REMEDIES FOR BAD FAITH/CONSUMER PROTECTION VIOLATIONS 32

VII.CONCLUSION 33

I. INTRODUCTION
In this age of proliferating lawsuits concerning whether an insured enjoys insurance coverage for specified claims, the insured's recitation of claims against an insurer invariably concludes with allegations of bad faith and violations of Washington's Consumer Protection Act (RCW 19.86). This topic has become increasingly important to both insureds and insurers as one result of bad faith on the part of an insurer can be an inability to assert any coverage defenses, not to mention having to pay attorney fees, costs and treble damages.

At the outset, it should be made clear there is substantial overlap between allegations of bad faith on the part of an insurer and alleged violations of the Consumer Protection Act ("CPA"). Indeed, bad faith on the part of an insurer is also deemed to be a violation of the CPA. Felice v. St. Paul Fire & Marine Ins. Co., 42. Wn. App. 352, 360?61, 711 P.2d 1066 (1985), review denied, 105 Wn.2d 1014 (1986)(citing RCW 19.86). See also Salois v. Mutual of Omaha Ins. Co., 90 Wn.2d 355, 359, 581 P.2d 1349 (1978); Whistman v. West American, 38 Wn. App. 580, 584, 686 P.2d 1086 (1984); Rice v. Life Ins. Co. of North America, 25 Wn. App. 479, 484, 609 P.2d 1387, review denied, 93 Wn.2d 1027 (1980).

This paper is intended to examine the status of bad faith and consumer protection law in Washington in the context of insurance coverage. Included is a discussion of the following points: 1) what may be the impact of including bad faith or consumer protection ("CPA") claims in a complaint against an insurer; 2) what are the legal standards to be applied to determine what constitutes "bad faith" and consumer protection violations on the part of an insurer; 3) what conduct on the part of insurers already have been found to constitute bad faith or consumer protection violations; and 4) what are the remedies if an insured succeeds in proving bad faith on the part of an insurer.

II.  IMPACT OF BAD FAITH/CONSUMER PROTECTION CLAIMS
If an insured prevails on a bad faith/CPA claim against an insurer, the insured may recover standard damages, including recovery of monetary damages, either up to or in excess of policy limits, treble damages (not exceeding $10,000), attorney fees, costs and interest. These remedies are discussed in Section VI below.  This section discusses the impact of bad faith/CPA claims in two other areas of interest to an insurer: 1) discovery into areas normally protected by the attorney?client and work product privileges, and 2) estoppel from asserting any policy defenses in the coverage action.

A.Enhanced Discovery
Escalante v. Sentry Insurance Co., 49 Wn. App 375, 743 P.2d 832 (1987), review denied, 109 Wn.2d 1025 (1988), concerned claims under an underinsured motorist insurance policy with limits of $100,000. The two claimants were Nova Jean Brooks, the driver of the automobile, and the estate of Linda Escalante, a passenger in the Brooks vehicle.  Sentry could have settled both claims for $50,000 each (thus exhausting policy limits), but declined to do so.  Sentry continued to reject plaintiffs' settlement overtures for at least eight months, until they were forced to file a coverage action, alleging bad faith and CPA violations, among other claims.  The trial court denied plaintiffs' motion to compel discovery and subsequently granted Sentry's motion for summary judgment on the bad faith claims.

The Court of Appeals reversed the grant of summary judgment in favor of Sentry, holding there was a cause of action for an insurer's alleged bad faith in handling an insured's underinsured or uninsured motorist claim, and that plaintiffs had standing to bring such a claim.  The case was remanded for a determination of questions of fact concerning Sentry's alleged bad faith conduct.
The court also reversed the trial court's denial of plaintiffs' motion to compel discovery.  One basis for Sentry's resisting plaintiffs' discovery efforts had been the attorney?client privilege. The court held that a claim of attorney?client privilege can be overcome where an insured can show a foundation in fact for a charge of bad faith tantamount to civil fraud.  Thus, the trial court was directed to use its discretion in conducting an in?camera inspection of the requested documents in order to determine whether plaintiffs had overcome the claimed privilege by showing a foundation in fact for a charge of civil fraud.  Id. at 393?94.

Another basis for resisting discovery had been the work product privilege. The court held there was no absolute privilege for work product, including mental impressions.  The court then went on to hold: mental impressions, etc., are discoverable in a bad faith action if they are directly in issue, and if the discovering party makes a stronger showing of necessity and hardship than is normally required under CR 26.

Id. at 397.
Escalante escalates the importance of allegations of bad faith in coverage actions as such allegations can now be used to pry open file drawers that were previously closed by privilege. Insurers and their counsel may very well be hesitant in reducing certain communications to writing whenever there is a chance of allegations of bad faith in a coverage dispute.  Insureds, on the other hand, will be certain to include allegations of bad faith in order to increase the pressure on insurers in coverage disputes.

B.Estoppel on Policy Defenses
Safeco Ins. Co. v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992), involved a coverage dispute over a claim that resulted when the insured (Hap Butler) fired a handgun into a truck whose occupants he suspected had been involved in blowing up his mailbox. The shot seriously injured Eddie Zenker, one of the occupants of the truck.

Zenker brought a civil action against Butler, the defense of which was tendered by Butler to Safeco.  Safeco agreed to provide Butler with a defense, under a reservation of rights, even though two weeks earlier it had filed a declaratory judgment action to determine if Zenker's claim was covered by its policy. Butler subsequently counterclaimed in the coverage action, contending Safeco was estopped from denying coverage based upon a prior letter to the Insurance Commissioner and had acted in bad faith in handling Zenker's claim.  The trial court granted Safeco's summary judgment motions concerning coverage and the specific estoppel argument at issue, but denied Safeco's summary judgment motion concerning its alleged bad faith. All three rulings were reviewed by the Supreme Court.

The Supreme Court agreed there was no coverage due to the intentional nature of Butler's acts, and that a letter previously written by Safeco to the Insurance Commissioner was not inconsistent with the policy language.  However, it also determined that the bad faith claims involved disputed questions of fact that needed to be resolved at trial.

The Court used this case as an opportunity to clarify several issues concerning bad faith when an insurer is defending under a reservation of rights.  The issues concerning the element of harm to the insured and the rebuttable presumption of harm are discussed in Section III below. Perhaps the most far?reaching impact of this decision is the Court's holding "where an insurer acts in bad faith in handling a claim under a reservation of rights, the insurer is estopped from denying coverage." Id. at 392 (emphasis supplied).  The basis for the Court's finding of estoppel (bad faith) was different from the bases argued by the plaintiff in support of summary judgment (the letter to the Insurance Commissioner). The Court realized if Safeco is found at trial to have acted in bad faith, it would be estopped from asserting any coverage defense, including the defense that the Court held was valid in Part III of its opinion. Id. at 406.

The Court's rationale apparently lay in part in an attempt to protect the interests of an insured.
An estoppel remedy, however, gives the insurer a strong disincentive to act in bad faith.  Therefore, an estoppel remedy better protects the insured against the insurer's bad faith conduct.

Id. at 394.  The Court may have underestimated the strength of the "disincentive" to act in bad faith. Although this case specifically addressed bad faith claims where there was a defense under a reservation of rights, the Court's holding was not so limited. Insurers may now, and perhaps understandably so, go to great lengths to investigate claims and otherwise protect their interests in order to avoid the weighty hammer of bad faith.  Will this lead to increases in litigation costs in the same way medical malpractice claims have driven up the costs of "defensive medicine?"  Only time will tell whether insureds, as a whole, will be well?served or ill?served by the remedy served up by the Washington Supreme Court in Butler.

III. BAD FAITH CLAIMS
A.Basis of Bad Faith
"An action for bad faith handling of an insurance claim sounds in tort." Butler, 118 Wn.2d at 389.  That cause of action, in tort, arises out of a contractual duty to act in good faith.  Id. at 399.
The duty to act in good faith is also statutorily imposed by RCW 48.01.030 & 48.30.010,  Industrial Indemnity Co. v. Kallevig, 114 Wn.2d 907, 916, 792 P.2d 520 (1990), and that duty of good faith applies both to the insurer and to the insured.  PEMCO v. Kelley, 60 Wn. App. 610, 619, 805 P.2d 822, review denied, 116 Wn.2d 1031 (1991)(citing RCW 48.01.030). "The duty to act in good faith or liability for acting in bad faith generally refers to the same obligation." Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 385, 715 P.2d 1133 (1986).  See also Tyler v. Grange Ins. Ass'n, 3 Wn. App. 167, 173, 473 P.2d 193 (1970).

B.Harm is an Element
The Supreme Court recently held "that a showing of harm is an essential element of an action for bad faith handling of an insurance claim." Butler, 118 Wn.2d at 389.  The Court went on to impose "a rebuttable presumption of harm once the insured meets the burden of establishing bad faith." Id. at 390.

[I]mposing a presumption of prejudice only after the insured shows bad faith adequately protects the competing societal interests involved. It provides a meaningful disincentive to insurers' bad faith conduct while protecting insurers from frivolous claims.

Id. at 392 (emphasis added). The insured must show by a preponderance of evidence the insurer acted in bad faith.  Id. at 394. The insurer may then "rebut the presumption by showing by a preponderance of the evidence its acts did not harm or prejudice the insured." Id. at 394.
C.Questions of Fact

Whether an insurer acted in bad faith is a question of fact, as is whether the insured has been prejudiced by the alleged bad faith of the insurer.  Butler, 118 Wn.2d at 395.  See also Escalante, 49 Wn. App. at 390; St. Paul Fire & Marine Ins. Co. v. Updegrave, 33 Wn. App. 653, 657, 656 P.2d 1130 (1983).  Examples of conduct which have been found to constitute bad faith are set forth in Section V herein. However, it has been held "mistakes and clumsiness alone do not amount to bad faith."  The Ins. Co. of the State of Penn. v. Highlands Ins. Co., 59 Wn. App. 782, 786, 801 P.2d 284 (1990), review denied, 116 Wn.2d 1032 (1991).

Reservation of Rights
An insurer's duty of good faith to an insured when defending under a reservation of rights was addressed in Tank v. State Farm. There the Court held:

[T]he duty of good faith of an insurance company defending under a reservation of rights includes an enhanced obligation of fairness towards its insured.  Potential conflicts between the interests of insurer and insured, inherent in a reservation of rights defense, underlie this enhanced obligation.

Tank, 105 Wn.2d at 383 (emphasis added). The Court went on to state "an insurer must deal fairly with an insured, giving equal consideration in all matters to the insured's interests."  Id. at 386 (emphasis in original).  This enhanced obligation imposes a duty beyond a standard contractual duty of good faith.  Butler, 118 Wn.2d at 393.   In Tank, the Court set forth the specific criteria it would use to determine whether an insurer had met this "enhanced obligation:"
First, the company must thoroughly investigate the cause of the insured's accident and the nature and severity of the plaintiff's injuries.  Second, it must retain competent defense counsel for the insured. Both retained defense counsel and the insurer must understand that only the insured is the client.  Third, the company has the responsibility for fully informing the insured not only of the reservation of rights defense itself, but of all developments relevant to his policy coverage and the progress of his lawsuit. Information regarding progress of the lawsuit includes disclosure of all settlement offers made by the company. Finally, an insurance company must refrain from engaging in any action which would demonstrate a greater concern for the insurer's monetary interest than for the insured's financial risk.

In addition to the above specific criteria to be met by the company, defense counsel retained by insurers to defend insureds under a reservation of rights must meet distinct criteria as well. First, it is evident that such attorneys' owe a duty of loyalty to their clients. . . . In a reservation of rights defense, RPC 5.4(c) demands that counsel understand that he or she represents only the insured, not the company. . . .

Second, defense counsel owes a duty of full and ongoing disclosure to the insured. This duty of disclosure has three aspects.  First, potential conflicts of interest between insurer and insured must be fully disclosed and resolved in favor of the insured. . . .  Second, all information relevant to the insured's defense, including a realistic and periodic assessment of the insured's chances to win or lose the pending lawsuit, must be communicated to the insured.  Finally, all offers of settlement must be disclosed to the insurers as those offers are presented. . . .  In order to make an informed decision [regarding settlement], the insured must be fully apprised of all activity involving settlement, whether the settlement offers or rejections come from the injured party or the insurance company.

Id., 105 Wn.2d at 388?89 (citations omitted).  Although Tank sounds a threatening warning for insurers contemplating defending an insured under a reservation of rights, the Court did suggest two alternative courses of action: 1) sue for a declaratory judgment before they undertake a defense (this apparently did not work in Butler), and 2) instruct an insured to pay for his own defense and reimburse him for defense costs if coverage is found to apply. Tank, 105 Wn.2d at 391.

E.Failure to Settle
Another area where allegations of bad faith often arise is where an insurer has refused to settle a case within policy limits. An insurer may be liable if "he is guilty of either bad faith or negligence in failing to settle a claim against the insured within its policy limits. Tyler, 3 Wn. App. at 172?73. See also Murray v. Mossman, 56 Wn.2d 909, 911, 355 P.2d 985 (1960); Evans v. Continental Cas. Co., 40 Wn.2d 614, 627, 245 P.2d 470 (1952).
In Tyler, 3 Wn. App. at 176, the court noted:
The duty of the insurance company, whether good faith or ordinary care, or both, as in our state, involves the question of whether the company must give equal consideration to the insured's interest.

The court then proceeded to adopt the "'no?limit' test as the best means of determining whether the interests of the insurer and the insured have been given equal consideration." Id. at 178.
[T]he interests of the insured and the insurer must be given equal consideration and the only practical test by which to apply this standard is to have the insurer consider the total risk in deciding whether or not to accept a settlement offer, without regard to who is bearing what portion of that risk.

Id. at 177.  The court went on to hold
The flat refusal to negotiate, under circumstances of substantial exposure to liability, a demonstrated receptive climate for settlement, and limited insurance coverage may show lack of good faith as well.

Id. at 179 (quoted in Hamilton v. State Farm Ins. Co., 83 Wn.2d 787, 794, 523 P.2d 193 (1974)).
In addition to considering whether reasonable settlement offers were made or considered, Washington courts have also considered the effort, or lack thereof, undertaken to properly evaluate settlement proposals.

In order for the insurer to make a good?faith decision not to settle within policy limits, it must have had made a diligent effort to thoroughly investigate the facts upon which an intelligent and good?faith judgment may be predicated.

Weber v. Biddle, 4 Wn. App. 519, 521, 483 P.2d 155 (1971). See also Tyler, 3 Wn. App. at 179 ("The insurer is liable for at least a failure to negotiate in good faith, if there is a lack of skillful evaluation of the injured party's disability").

F.Other Considerations
Washington also has recognized a cause of action for an insurer's bad faith in handling an insured's underinsured or uninsured motorist claim.  Escalante, 49 Wn. App at 384?85.  Note that in Tyler, 3 Wn. App. at 173?74, the court enumerated a number of criteria used by courts in other states to determine if an insurer had acted in bad faith.

IV.  CONSUMER PROTECTION CLAIMS
An insured's private claim under the Consumer Protection Act, RCW 19.86, must satisfy the five elements set forth in Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 780, 719 P.2d 531 (1986). See also Wash. State Phys. Ins. Exchange & Assoc. v. Fisons Corp., 122 Wn.2d 299, 312, 858 P.2d 1054 (1993); Kallevig, 114 Wn.2d at 920?21; Saunders v. Lloyd's of London, 113 Wn.2d 330, 343, 779 P.2d 249 (1989); Eifler v. Shurgard Capital Mgt. Corp., 71 Wn. App. 684, 696, 861 P.2d 1071 (1993); Strother v. Capitol Bankers Life Ins. Co., 68 Wn. App. 224, 241, 842 P.2d 504, 513 (1992), review granted, 121 Wn.2d 1008 (1993); Starczewski v. Unigard Ins. Group, 61 Wn. App. 267, 272, 810 P.2d 58, review denied, 117 Wn.2d 1017 (1991); Ins. Co. of Penn., 59 Wn. App. at 786; Nguyen v. Glendale Construction Co., 56 Wn. App. 196, 202, 782 P.2d 1110 (1989), review denied, 114 Wn.2d 1021 (1990); Evergreen Int'l, Inc. v. American Cas. Co., 52 Wn. App. 548, 554, 761 P.2d 964 (1988).  Those five distinct elements are as follows:

(1) unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to plaintiff in his or her business or property; (5) causation.

Hangman Ridge, 105 Wn.2d at 780.
A.Unfair or Deceptive Act or Practice
An unfair or deceptive act or practice can be established either by showing a per se unfair trade practice or by showing the act or practice has the capacity to deceive a substantial portion of the public.  Saunders, 113 Wn.2d at 344; Hangman Ridge, 105 Wn.2d at 785?86. Note that post?sale acts and practices are subject to the CPA. Salois, 90 Wn.2d at 359.

1.Per Se Unfair Trade Practice
RCW 48.30.010 prohibits any person in the insurance business from engaging in unfair or deceptive acts or practices in the conduct of such business. It also authorizes the Insurance Commissioner to promulgate regulations defining such unfair or deceptive acts or practices, which has been done in WAC 284?30?330.   RCW 19.86.170 expressly provides that violations of the insurance regulations are subject to the CPA.  Kallevig, 114 Wn.2d at 924.
[A per se unfair trade practice] is satisfied in an insurance case by the commission of any one of the 19 acts defined in WAC 284?30?330 as unfair or deceptive, because such an act violates RCW 48.30.010(1), prohibiting anyone engaged in the business of insurance from engaging in unfair or deceptive practices.

Ins. Co. of Penn., 59 Wn. App. at 788?89 (footnotes omitted).  See also Kallevig, 114 Wn.2d at 920?23; Villella v. PEMCO, 106 Wn.2d 806, 820, 725 P.2d 957 (1986)("A per se unfair trade practice exists when a statute has been violated and such violation has been declared by the Legislature to constitute an unfair or deceptive act in trade or commerce"); Federated American Ins. Co. v. Strong, 102 Wn.2d 665, 675, 689 P.2d 68 (1984)("A per se violation of the CPA which is privately actionable is established by conduct which is both unlawful and against public policy as declared by the Legislature or the judiciary").  Acts or practices not enumerated in WAC 284.30.330 will not be considered per se unfair trade practices. See, e.g., Strother, 68 Wn. App. at 242 (addressing WAC 284?23?440 and 284?23?450).

Many of the unfair or deceptive acts or practices set forth in WAC 284?30?330 require an insurer to act reasonably. Ins. Co. of Penn., 59 Wn. App. at 789. Even where the specific provision does not utilize a reasonableness standard, an insurer may still be let off the CPA hook if there was a "reasonable justification for its conduct."  Starczewski, 61 Wn. App. at 273 (concerning an alleged violation of WAC 284?30?330(7)).
Note that only a single violation of WAC 284?30?330 is sufficient to constitute an unfair trade practice.  Kallevig, 114 Wn.2d at 922; Starczewski, 61 Wn. App. at 273; Evergreen Int'l, 52 Wn. App. at 558.

2.Non?Per Se Violation
If an insured cannot prove a per se unfair trade practice, he or she can attempt to prove in the alternative that the complained of act has the capacity to deceive the public; there need not be an intention to deceive the public. Hangman Ridge, 105 Wn.2d at 785. "The purpose of the capacity?to?deceive test is to deter deceptive conduct before injury occurs."  Id. (emphasis in original). In Strother, the court determined that an insurer's knowing failure to issue a "replacement notice" to its insured and to the prior insurer, when a replacement life insurance policy was being issued, had the capacity to deceive the public. Strother, 68 Wn. App. at 243.

B.Occurring in Trade or Commerce
"The second element which a private plaintiff must establish is that the act or practice complained of occurred in the course of trade or commerce." Hangman Ridge, 105 Wn.2d at 785. There is generally no question that claims of bad faith in the context of insurance involve acts that occurred in the course of trade or commerce.  See, e.g., Strother, 68 Wn. App. at 243.  Also, a showing of a per se unfair trade practice satisfies this element. Hangman Ridge, 105 Wn.2d at 786.
C.Public Interest Impact

As in the case of the first element, this element can be shown by a per se violation or by factors indicating the public has an interest in the complained of act.  In the context of insurance transactions, however, the public interest element is satisfied per se through the legislative pronouncement in RCW 48.01.030.  Hangman Ridge, 105 Wn.2d at 791.  See also Strong, 102 Wn.2d at 675; Salois, 90 Wn.2d at 359 (citing RCW 48.01.030); Strother, 68 Wn. App. at 243.

D.Injury to Plaintiff
A plaintiff in a private CPA action must show he or she was injured in his or her business or property.  Hangman Ridge 105 Wn.2d at 792 (citing RCW 19.86.090).  "The injury involved need not be great, but it must be established." Id.  Furthermore, the injury need not be a monetary injury.  Updegrave, 33 Wn. App. at 658?59 ("The consumer who is forced to defend an action which is premised upon unfair and deceptive acts will generally sustain damages for purposes of the Consumer Protection Act. These damages include the consumer's inconvenience, financial consideration such as loss of time in helping prepare the case, actual time spent in court, and litigation costs for attorney's fees, filing fees, investigative expenses, and expert witness fees").
Insurers have argued that insureds have suffered no harm when they have executed a settlement agreement with an injured third?party, which agreement includes a release providing there shall be no execution against the insureds. This argument has been soundly rejected in a series of Washington cases.  See, e.g., Butler, 118 Wn.2d at 396?400, Greer v. Northwestern Nat'l Ins. Co., 109 Wn.2d 191, 204, 743 P.2d 1244 (1977), Steinmetz v. Hall?Conway?Jackson, Inc., 49 Wn. App. 223, 741 P.2d 1054 (1987), review denied, 110 Wn.2d 1006 (1988), Kagele v. Aetna Life & Casualty Co., 40 Wn. App. 194, 196, 698 P.2d 90, review denied, 103 Wn.2d 1042 (1985).

E.Causation
In Strother, 68 Wn. App. at 244, the court stated
[A] plaintiff must make a showing that there is a causal link between the unfair trade practice and the injury; in other words, that the unfair trade practice was the proximate cause of the injury.

See also Hangman Ridge, 105 Wn.2d at 793 ("A causal link is required between the unfair or deceptive acts and the injury suffered by the plaintiff").

F.Other CPA Considerations
1.Liberal interpretation of Consumer Protection Act.
One overriding factor considered by the courts in CPA actions is the underlying purpose of the CPA. "The CPA is designed to protect the public and foster fair and honest competition, and is to be liberally construed to serve that end." Evergreen Int'l, 52 Wn. App. at 558 (citing RCW 19.86.920).  See also Hangman Ridge, 105 Wn.2d at 785; Salois, 90 Wn.2d at 358; Escalante, 49 Wn. App. at 386.

2.Standing.
In addition to examining how the five elements of a CPA violation may be met by an insured, there are other issues concerning a successful CPA claim.  For example, a third?party beneficiary does not have standing to bring an action for a per se negligence or CPA action.  Tank, 105 Wn.2d at 391?95.  See also Transamerica Title Insurance Co. v. Johnson, 103 Wn.2d 409, 418, 693 P.2d 697 (1985); Kagele, 40 Wn. App. at 199, Rice, 25 Wn. App. at 485 (third party beneficiary cannot bring a per se negligence action, but may be able to bring a per se CPA action); Bowe v. Eaton, 17 Wn. App. 840, 565 P.2d 826 (1977).  Cf. Green v. Holm, 28 Wn. App. 135, 137, 622 P.2d 869 (1981).  In Murray, 56 Wn.2d at 911?14, the Court held that a judgment?creditor did not have standing to pursue a bad faith claim against the judgment?debtor's insurer.  However, in Gould v. Mutual Life Insurance Co., 37 Wn. App. 756, 683 P.2d. 207 (1984), it was held that a plaintiff who was the beneficiary under the life insurance policy was owed a direct contractual obligation by the insurer and could therefore bring a CPA claim against an insurer.  It has also been determined that an injured passenger in an automobile accident has standing, as a named insured ("passenger"), to bring a CPA action against an insurer, even if the action is based upon a violation of the insurance regulations. Escalante, 49 Wn. App. at 386?90.

3.Severence and scope of potential liability.
It has also been recognized that a CPA claim is independent of any underlying contractual claim premised on the insurance policy, and therefore the right to recover damages under the CPA is completely independent of the underlying contractual rights. Strother, 68 Wn. App. at 245, 842 P.2d at 515 n.59.  Corporate officers and agents, including counsel retained by the insurer, can also incur personal liability under the CPA. Gould, 37 Wn. App. at 759. In Vaughn v. Vaughn, 23 Wn. App. 527, 597 P.2d 932, review denied, 92 Wn.2d 1023 (1979), the court held that claims under the CPA were not compensable under the Washington Insurance Guaranty Association Act (RCW 48.32).

V. BAD FAITH/CONSUMER PROTECTION VIOLATIONS
It is difficult to predict what actions on the part of an insurer may be found to constitute bad faith or CPA violations.  There are, however, a few general rules that may provide initial guidance in evaluating such potential claims.

[The] fiduciary duty to act in good faith is fairly broad and may be breached by conduct short of intentional bad faith or fraud.  Thus, an insurer's denial of coverage, without reasonable justification, constitutes bad faith. . . .

An insurer does not have a reasonable basis for denying coverage and, therefore, acts without reasonable justification when it denies coverage based upon suspicion and conjecture.  In other words, an insurer must make a good faith investigation of the facts before denying coverage and may not deny coverage based on a supposed defense which a reasonable investigation would have proved to be without merit.

Kallevig, 114 Wn.2d at 916?17 (citations omitted). See also Saunders, 113 Wn.2d at 345 ("An insurer's reasonable denial of coverage does not constitute an unfair practice"); Transcontinental Ins. Co. v. WPUDUS, 111 Wn.2d 452, 470, 760 P.2d 337 (1988)("A denial of coverage based on a reasonable interpretation of the policy is not bad faith, and even if incorrect, does not violate the Consumer Protection Act if the insurer's conduct was reasonable"); Villella, 106 Wn.2d at 821 ("An insurance company violates the Consumer Protection Act if it acts without reasonable justification in handling a claim by its insured.  A denial of coverage, although incorrect, based upon reasonable conduct of the insurer does not constitute an unfair trade practice"); Gingrich v. Unigard Security Ins. Co., 57 Wn. App. 424, 433, 788 P.2d 1096 (1990)("An insurer breaches its duty by acting without reasonable justification in handling an insured's claims. Even if incorrect, a reasonable denial of coverage by the insurer is not a violation"); Castle & Cook, Inc. v. Great American Insurance Co., 42 Wn. App. 508, 518, 711 P.2d 1108, review denied, 105 Wn.2d 1021 (1986)("A denial of coverage based on a reasonable interpretation of the policy is not in bad faith"); Felice, 42 Wn. App. at 364 ("denial of coverage due to a debatable question of coverage, however, is not bad faith giving rise to a Consumer Protection Act violation"); Smith v. Ohio Casualty Insurance Co., 37 Wn. App. 71, 74, 678 P.2d 829 (1984)("mere denial of coverage due to a debatable question of coverage is not bad faith giving rise to a CPA violation"); Safeco Ins. Co. of America v. JMG Restaurants, Inc., 37 Wn. App. 1, 15, 680 P.2d 409 (1984)("A refusal to pay a claim based upon suspicion and conjecture may be found to violate the fiduciary duty of good faith.  Such a refusal must be based upon reasonable grounds"); Pruitt v. Alaska Pacific Assurance Co., 28 Wn. App. 802, 804, 626 P.2d 528 (1981)("An insurance company's wrongful refusal to pay a claim breaches its duty to deal in good faith").

The key inquiry was set forth in Kallevig, 114 Wn.2d at 920, where the Court stated "what is determinative is the reasonableness of the insurer's action in light of all the facts and circumstances of the case." (Emphasis added.)
Other Washington cases also provide guidance on the standard that will be used to determine whether an insurer's actions will be considered to have been in bad faith or otherwise violative of the CPA.

The denial of coverage or benefits . . . is not in bad faith unless it is both frivolous and unfounded.  Neither denial of coverage because of a debatable coverage question nor delay, unaccompanied by an unfounded or frivolous reason, constitutes bad faith.

Ins. Co. of Penn., 59 Wn. App. at 786?87 (citations omitted).  See also McLanahan v. Farmers Ins. Co., 66 Wn. App. 36, 40-41, 831 P.2d 160, review denied, 120 Wn.2d 1006 (1992) (reasonable delay in adjusting an insured's claim does not constitute a CPA violation).
[D]elay alone does not constitute bad faith because it did not constitute an unfounded and frivolous denial of benefits. . . .  [The insurer] denied coverage based on a reasonable interpretation of the policy, thus it cannot be said the denial was in bad faith.

Felice, 42 Wn. App. at 361 (cited in Transcontinental, 111 Wn.2d at 470?71).
An insurer denying a duty to defend has the burden to establish as a matter of law on a summary judgment motion that the injury complained of falls outside the indemnity coverage of the policy or that claims against the insured are unambiguously exempted from coverage.

Viking Ins. Co. v. Hill, 57 Wn App. 341, 347, 787 P.2d 1385 (1990).
An insurer's breach of the duty of good faith may be established without a showing of misrepresentation, deceit or other species of fraud. Actions by an insurer done without reasonable justification are done without the good faith mandated by RCW 48.01.030 and are sufficient to constitute a violation of the Consumer Protection Act. However, the "mere denial of coverage due to a debatable question of coverage is not bad faith giving rise to a CPA violation."

Whistman, 38 Wn. App. at 584?85 (citations omitted).
The [insurer's] conduct need not amount to intentional bad faith or dishonesty, misrepresentation or fraud.  An insurance company violates the Consumer Protection Act if it acts without reasonable justification in handling a claim by its insured.

JMG Restaurants, 37 Wn. App. at 11.
Bad faith requires a showing of a frivolous and unfounded denial of benefits.  [The insurer] denied coverage based on a reasonable interpretation of the policy; this was not bad faith as a matter of law.
. . . [M]ere denial of benefits due to a debatable question of coverage is insufficient [to show bad faith].

Miller v. Indiana Ins. Cos., 31 Wn. App. 475, 479, 642 P.2d 769 (1982).
In asserting bad faith claims against an insurer, it is the insured that has the burden of making an evidentiary showing "that the [insurer] acted in bad faith; that its denial of coverage was frivolous and unfounded."  Castle & Cook, 42 Wn. App. at 518.  See also Burnham v. Commercial Cas. Ins. Co., 10 Wn.2d 624, 627, 117 P.2d 644 (1941).
One potential defense to a CPA claim that insurers should be sure not to overlook, even though it is unlikely to arise very often, was set forth in Mutual of Enumclaw v. Cox, 110 Wn.2d 643, 757 P.2d 449 (1988). In that case, the insured was found to have attempted to defraud the insurer by overstating the value of personal property destroyed in a house fire.  The Court held that the purpose of the CPA would not be served by awarding damages to an insured under the CPA after the insured had tried to perpetrate a fraud on the insurer.  "The CPA exists to protect consumers, not to aid and abet fraud. We hold that [the insured] is not entitled to recovery under the CPA." Id. at 653.

From a risk management standpoint, one means of minimizing bad faith claims against insurer?clients is to assist them to avoid making mistakes that have already been characterized as bad faith or Consumer Protection Act ("CPA") violations.  The following is a compilation of those cases where insurers have lost on bad faith/CPA claims. Starczewski, 61 Wn. App. at 274?75, Gingrich, 57 Wn. App. at 434, Whistman, 38 Wn. App. at 585, Miller, 31 Wn. App. at 478.
The most recent example of an appellate court upholding a finding of a CPA violation is Industrial Indemnity Co. v. Kallevig, 114 Wn.2d 907, 792 P.2d 520 (1990). In this case Kallevig, the insured, owned a restaurant that was destroyed by fire. The investigator for the local fire department determined Kallevig had intentionally caused the fire. The independent fire investigator retained by the insurer also determined the fire had been intentionally set. The insurer's investigation also revealed the restaurant was in financial trouble.  Finally, Kallevig refused the insurer's request to submit to a polygraph test.  Industrial Indemnity concluded Kallevig had intentionally caused the fire and therefore denied Kallevig's claim, later initiating a declaratory judgment action to determine coverage.

In making its determination, Industrial Indemnity ignored the report of its own claims examiner which stated the fire could have been caused by the faulty workmanship of an electrical contractor.  The insured's own consultants determined the fire most likely started in a faulty electrical outlet box and was not intentionally caused.  They also testified at trial that the investigation by the municipal fire investigator, upon which Industrial Indemnity relied, had been inadequate.
Industrial Indemnity never retained an electrical expert to examine the possibility of faulty workmanship by the electrical contractor, nor did the electrical engineer they retained ever visit the fire site or dismantle the outlet box for an inspection. The jury found Industrial Indemnity had failed to conduct an adequate investigation, and had without reasonable justification based its denial on suspicion and conjecture.  Industrial Indemnity's denial of coverage was therefore in bad faith.
In a similar fire?related case, Safeco Ins. Co. v. JMG Restaurants, Inc., 37 Wn. App. 1, 680 P.2d 409 (1984), the insurer was again found to have been in bad faith in denying the insured's claim.  Safeco denied the claim on the basis the insured intentionally caused the fire.  Safeco subsequently brought a declaratory judgment action to determine coverage; the insured counterclaimed, alleging bad faith and CPA violations. The court bifurcated the liability and bad faith issues at trial. At the first trial, the jury found the claim was covered by the policy.  At the second trial, the insurer was found to have denied the claim in bad faith, in violation of the CPA.
The real reason the insurer had denied the claims, notwithstanding noncompliance with several technical aspects of policy conditions, was that the insured had been suspected of arson.  Although the insured had been formally charged with arson, that charge was dropped two months later. The Court of Appeals found there was adequate evidence to support the jury's verdict that the insurer was not fair, honest and objective or acted without reasonable justification in handling the claim.

In yet another case involving fire insurance, Evergreen Int'l, Inc. v. American Cas. Co., 52 Wn. App. 548, 761 P.2d 964 (1988), the jury found the insurer had violated its duty of good faith to the insured. In adjusting the claim, a dispute arose concerning whether the building had been underinsured, thereby triggering the coinsurance clause. However, before that question could be resolved, the insurer stopped paying "business interruption" benefits because it wanted to settle and pay the entire claim at one time.  The insurer's failure to continue payments and to settle promptly was found to violate state regulations and constituted a per se violation of the CPA.
In Nguyen v. Glendale Construction Co., 56 Wn. App. 196, 782 P.2d 1110 (1989), the subject insurance policy was a homeowners warranty whereby the insurance company was obligated to pay for correcting covered defects if the builder failed to do so. The insurer denied coverage of Nguyen's claims because there had been no written claim within 30 days of the end of the one?year coverage period, as required by the policy. This policy provision violated a state statute requiring a minimum period of one year after accrual to bring a claim under the policy.  The insurer's attempt to enforce this illegal contractual limitation constituted a per se violation of the CPA because it is presumed that people know the law.

The insurer in Greer v. Northwestern Nat'l Ins. Co., 109 Wn.2d 191, 743 P.2d 1244 (1987), successfully argued at trial in a coverage action, and subsequently before the Court of Appeals, that the "Guest Liability Exclusion" within a motorcycle policy excluded coverage for damages suffered by a passenger. New evidence was subsequently discovered, however, revealing the insurer had previously informed the Insurance Commissioner that the exclusion pertained only to suits brought by third parties against a passenger and not to damages suffered by or suits on behalf of a passenger. At retrial, the court found as a matter of law the insurer had acted in bad faith in denying the insured's claim on the basis of the guest liability exclusion.

In Nyby v. Allied Fidelity Ins. Co., 42 Wn. App. 543, 712 P.2d 861 (1986), the insurer issued a supersedeas bond on behalf of a judgment debtor who was appealing the adverse judgment of the trial court. The judgment debtor lost the appeal in the Court of Appeals but did not pay the judgment.  The insurer bonding company refused to pay on the bond. Instead, it first attempted to return the premiums and cancel the bond; the court found this to be both unfair and in bad faith.  The insurer later argued the language of the bond required the judgment debtor to appeal to the State Supreme Court; the court found this defense to be frivolous and therefore violative of the CPA.

An attempt to return premiums and cancel a policy was also addressed in Salois v. Mutual of Omaha, 90 Wn.2d 355, 581 P.2d 1349 (1978). Prior to the physical issuance of a policy, the insurer was informed of medical problems of the wife insured.  When the insurer's attempt to cancel the policy was refused, the policy was issued with an exclusion for the wife's condition. At trial, the jury found the wife had not made false and material representations concerning her health or medical history, and the insurer had breached its duty of good faith and fair dealing in refusing to pay the insureds' claim. The insurer was also found to have attempted to persuade the insureds to accept benefits that were less than that to which they were entitled under the policy.
An insurer's attempt to rescind a policy was also at issue in Levy v. North American, 90 Wn.2d 846, 586 P.2d 845 (1978).  The policy was issued in April, 1974. In June, 1974, Levy suffered permanent injuries to his leg when he was pinned under a desk that was being moved while he was on the job.  North American was notified of the injury in December, 1974, and received Levy's medical records in January, 1975.  After reviewing Levy's medical records, North American attempted to rescind the policy, claiming that if they had known of his bronchial condition, they would either have not insured him or would have added an exclusion that particular condition.  In fact, Levy had informed the North American agent he had a history of colds and utilized an atomizer to clear his bronchial tubes from time to time. The agent asked no further questions and did not enter this information on Levy's insurance application.  Levy alleged that the attempted rescission without reasonable justification constituted a violation of the CPA.  The Court agreed that a wrongful rescission would constitute a CPA violation and remanded the case for trial.
An insurer's attempts to charge an insured in excess of the contracted premium rate, and to change premium amounts in the middle of an anniversary year, were found to be violations of the CPA in St. Paul Fire & Marine Ins. Co. v. Updegrave, 33 Wn. App. 653, 656 P.2d 1130 (1983).  For example, St. Paul advised its agent there would be a 10% premium increase for the coming year, but the bill submitted by the insurer half?way into that year contained a 280% increase, retroactive to the beginning of the policy year.

A failure of the insurer to settle within policy limits has been the basis for a finding of bad faith in several cases. In Hamilton v. State Farm Ins. Co., 83 Wn.2d 787, 523 P.2d 193 (1974), the insured's attorney in the underlying action (retained by the insurer) had advised against two settlement offers that were within policy limits.  One of the offers came after a defense verdict had been overturned on appeal and remanded for a second trial. In the subsequent coverage litigation, the settlement offers ($5,000 and $7,500) were deemed to have been reasonable in light of the risk of a verdict in excess of policy limits ($10,000). The ultimate plaintiff's verdict in the underlying cause of action was $45,000. The attorney was found to have negligently or in bad faith refused to recommend settlement and the insurer was held liable for the entire $45,000 verdict.
In Weber v. Biddle, 4 Wn. App. 519, 483 P.2d 155 (1971), the insurer had agreed to defend the underlying action under a reservation of rights. The basis for questioning coverage were contradictory versions of the automobile accident given by the insured, one of which entailed a driver that did not have the insured's consent to be driving.  The insurer was found to have been in bad faith when it rejected a settlement offer for the $10,000 policy limits; the jury had returned a plaintiff's verdict of $57,500 in the underlying action.

Although the elements of the insurer's actions that led to the finding of bad faith in Weber v. Biddle were not enumerated in the appellate court's opinion, the shortcomings of defense counsel were clearly spelled out in Tyler v. Grange Ins. Ass'n, 3 Wn. App. 164, 473 P.2d 192 (1970).  In Tyler, the insurer rejected a settlement offer for policy limits even though the insured requested the case be settled.  The insured's policy limits were $25,000; the eventual plaintiff's verdict in the underlying case was for $50,000.  The failures of the insurer lay in the fact there was virtually no effort to evaluate the plaintiff's case until less than a month before trial, when the insured's and the plaintiff's depositions were taken, and there was no effort to explore settlement and make a meaningful offer of settlement. "[T]he failure to make the meaningful offer was both the failure to exercise good faith and negligence on the part of the insurance company."  Id. at 179.

Defense counsel never reviewed plaintiff's medical records to evaluate his injuries in the event of a plaintiff's verdict on liability; defense counsel first learned of the extent of plaintiff's injuries (including brain damage) when they were presented at trial!  Thus, it was clear the insurer, through its defense counsel, had failed to undertake an adequate investigation to inform itself of the damages and verdict potential of the underlying case.

The insurer in Evans v. Continental Cas. Co., 40 Wn.2d 614, 245 P.2d 470 (1952), found itself in a most difficult position while it defended the underlying case under a reservation of rights. The insured was an automobile rental agency that had rented to a driver who was subsequently involved in a fatal accident.  The liability of the rental agency was premised on allegations it rented to an intoxicated person.  However, the policy excluded coverage if a rental was made to an intoxicated person.  Thus, the interests of the insurer and the insured were diametrically opposed from the beginning!

The insurer refused the insured's demand either to defend without reservation and accept liability up to policy limits ($10,000) or to turn the defense completely over to the insured, but at the insurer's risk and expense.  Further, the insurer refused to participate in any settlement negotiations, even though the claims could have been settled for $8,000 (the insured agreed to contribute $2,000).  Ultimately, the insured settled the claims for $9,250.  The insurer was found to have acted in bad faith when it refused to participate in settlement discussions within policy limits with the potential for a recovery by plaintiffs in excess of policy limits.

VI.  REMEDIES FOR BAD FAITH/CONSUMER PROTECTION VIOLATIONS
In general, an insured's damages relating to the underlying claim are limited to policy limits and, if applicable, to the cost of defending that claim. For example, if an insurer is found to have only wrongfully refused to defend the underlying claim, recoverable damages include the expense of defending the underlying claim and the amount of the judgment entered against the insured on that claim, up to policy limits.  Greer, 109 Wn.2d at 202?03; Waite v. Aetna Cas. & Sur. Co., 77 Wn.2d 850, 856, 467 P.2d 847 (1970); Smith, 37 Wn. App. at 75. A bad faith refusal to defend will expose an insurer to the remedies set forth in the Consumer Protection Act, as set forth below.
However, if an insurer is found to have in bad faith refused to settle within policy limits, the insurer can be held liable for the amount that the judgment exceeded policy limits, in addition to its policy limits.  Greer, 109 Wn.2d at 203 n.6.  See also Hamilton, 83 Wn.2d at 791 (citing Murray, 56 Wn.2d at 911); Evans, 40 Wn.2d at 627 ("An insured can recover from his insurer the amount of a judgment rendered against him, including the amount in excess of the policy limits, when the insurer has been guilty of bad faith in failing to effect a settlement for a smaller sum").  In addition to recovering in the event of an adverse judgment, an insured may also recover damages when the insurer has failed to settle but the insured is able to settle on his own; such damages, however, will be limited to policy limits and reasonable attorney fees and expenses.  Evans, 40 Wn.2d at 628.

Under the Consumer Protection Act, recoverable damages in a private action include costs, attorney fees and treble damages.  RCW 19.86.090.  Costs recoverable under the CPA are limited to statutory costs recoverable under RCW 4.84.010. Evergreen Int'l, 52 Wn. App. at 561.   Attorney fees recoverable under the CPA need not be limited by a contingent fee agreement; they may be determined by the "lodestar" method set forth in Bowers v. Transamerica Title Insurance Co., 100 Wn.2d 581, 675 P.2d 193 (1983). Evergreen Int'l, 52 Wn. App. at 559?60.

VII. CONCLUSION
It appears clear that Washington courts, over the past few years, have been increasingly receptive to claims of bad faith on the part of both insurers and their insureds.  As noted earlier, the duty of good faith runs to all parties to a contract of insurance. Furthermore, the stakes involved if insurers fail to act in good faith appear to have been significantly raised by Safeco v. Butler. Insurers must be careful to abide by the regulations set forth in WAC 284?30 as well as to generally accepted norms of good faith dealing with their insureds. 
 
Insureds, on the other hand, must be honest and truthful in their dealings with insurers, and must be careful to abide by policy conditions in reporting claims and cooperating with an insurer's investigation.
It is difficult to set forth exactly what insurers and insureds must do to protect themselves against claims of bad faith. The Court in Tank v. State Farm enumerated suggested actions on the part of an insurer when defending an insured under a reservation of rights.  Otherwise, the courts have not given us a set of prophylactic measures that will insulate an insurer from claims of bad faith.  In the end run, both the insurer and insured must abide by the relevant statute and regulations, policy requirements and an inherent sense of fair dealing.