Washington Law Permits Extra-Contractual Suits Against Individual Insurance Adjusters

April 3rd, 2018

Last week, in Keodalah v. Allstate Insurance Company, No. 75731‑8-I, 2018 WL 1465526 (Wash. Ct. App. Mar. 26, 2018), Division One of the Court of Appeals of the State of Washington held a policyholder can bring a “bad faith” lawsuit against an individual adjuster employed by an insurance company even though the adjuster’s actions were all undertaken in the course and scope of her employment. 

Previously, first-party insurers were usually successful in obtaining dismissal of individually named company adjusters under Civil Rule 12(b)(6), which allows dismissal for failure to state a viable cause of action. Insurers would typically argue that, under the doctrine of respondeat superior—a bedrock principle of agency law whereby the employer answers for the acts of its employees within the course and scope of their employment—the insurance company was accepting full responsibility for the acts of the adjuster. Consequently, individually suing the adjuster in addition to the insurance company would not afford the plaintiff-insured an additional cognizable claim or remedy. Of course, if the adjuster was employed by an outside independent adjusting firm, the Washington courts permitted individually naming the independent adjuster and/or the independent adjusting firm in the lawsuit. See Merriman v. Amer. Guar. & Liab. Ins. Co. 198 Wn. App. 594, 396 P.3d 351 (2017).  But, typically, if an adjuster directly employed by the insurance company was sued by a first-party insured alongside the insurance company itself, defense counsel would prevail in getting the individually-named adjuster dismissed from the lawsuit. 

The trial court in Keodalah applied Washington law as expected to dismiss the individually-named adjuster from the bad-faith lawsuit under Civil Rule 12(b)(6), but the Court of Appeals reversed. The Court of Appeals held Washington law created an individual cause of action against the adjuster—in addition to any cause of action against the insurance company employing the adjuster—under both common-law bad faith and the Consumer Protection Act (CPA), which applies to unfair or deceptive acts or practices in the business of insurance because insurance is deemed to be in the public interest. 

The Court of Appeals held the common-law bad faith claim against the adjuster was authorized because Washington law imposes a duty of good faith and fair dealing on “all persons” involved in insurance. RCW 48.01.030. The statutory definition of “person” is broad and includes “any individual, company, insurer, association, organization, reciprocal or interinsurance exchange, partnership, business trust, or corporation.” RCW 48.01.070. Consequently, the Court of Appeals reasoned the “plain language” of the statute permitted suing the individual adjuster alongside the insurance company that employed her. 

Moreover, even though a consumer normally had to show a contractual relationship or “consumer transaction” to file suit against a person or entity under the CPA, the Court of Appeals was unconvinced and held “individual insurance adjusters can be liable for a violation of the CPA.” 

The only cause of action the Court of Appeals in Keodalah did not allow against the individual adjuster was a claim under Washington’s Insurance Fair Conduct Act (IFCA).  This is because an earlier decision by the Washington Supreme Court foreclosed such claims against individual adjusters by finding that IFCA does not create an independent private cause of action for violation of an insurance regulation.  See Perez-Cristanos v. State Farm Fire & Cas. Ins. Co., 187 Wn.2d 669, 672, 389 P.3d 476 (2017).  

Keodalah has upended Washington insurance law and, if not reversed by the Washington Supreme Court, could have significant strategic and substantive implications. One practical effect of Keodalah is that out-of-state first-party insurers sued in Washington alongside their in-state adjusters will be unable to remove cases to federal court because the inclusion of the in-state adjuster as a defendant will destroy the complete diversity of citizenship required to allow removal. More first-party insurers will likely consider suing their insureds before their insureds sue them, so there may be an increase of declaratory judgment actions filed by first-party insurers in the Washington federal courts.  

The Keodalah holding also raises a number of additional questions and is sure to foster confusion. Washington law appears to have carved a gaping exception to the usual operation of the doctrine of respondeat superior as it applies to first-party insurers sued for bad faith. Now, even though naming the insurance company adjuster personally in the lawsuit does not necessarily afford the plaintiff-insured any additional remedies, it opens a proverbial “can of worms” for insurance companies, their adjusters, and even coverage counsel. One issue raised is whether and under what circumstances the defendant-adjuster should have separate legal counsel from that defending the insurance company. 

Another issue arises from Keodalah’s expansive notion of “all persons” that may be sued for bad faith.  For example, the statute the Court of Appeals relied upon to impose a duty of good faith on “all persons” involved in insurance also provides: 

Upon the insurer, the insured, their providers, and their representatives rests the duty of preserving inviolate the integrity of insurance. 

RCW 48.01.030. Previously, in Garoutte v. American Family Insurance Co., 2013 WL 231104, at *2 (W.D. Wash. Jan. 22, 2013), the United States District Court for the Western District of Washington, applying Washington law, held that the above statutory passage did not create a direct cause of action against adjusters and other insurance company representatives because, if read to do so, it would also “create a cause of action for bad faith against ‘the insured’,” which the Court in Garoutte found impermissible. But the Court of Appeals in Keodalah did not apply the reasoning of Garoutte and rejected drawing any distinctions between “third-party corporate adjusters” (i.e. independent adjusters) and “individuals directly employed by the insurer,” finding both “owe a duty of good faith under RCW 48.01.030.” 

The Court of Appeals further noted that RCW 48.01.020 expressly states the Washington insurance statutes apply to “all persons having to do” with “[a]ll insurance and insurance transactions in this state[.]” (Emphasis added.) If the meaning of these broad statutory words is as “plain” as the Court of Appeals in Keodalah believes them to be, its holding seems to open the door to bad faith claims against insureds, too. Such an outcome is likely not intended and the Washington courts will almost certainly craft a reason to foreclose such claims even if Keodalah is not reversed. So the fact that the holding in Keodalah leaves the door open in this regard further reveals the flaws in the Court’s statutory interpretation that created a bad faith cause of action against an adjuster directly employed by the defendant-insurer. 

Another question raised by Keodalah’s expansive notion that “all persons” “having to do” with insurance may be sued for bad faith is whether this also means coverage counsel as well. After all, coverage counsel have something “to do” with insurance as they advise their insurance company clients on coverage and claims-handling issues.  Does this open coverage counsel to bad faith and CPA claims, too? And, if so, then should coverage counsel enter into Hold Harmless agreements with their insurance company clients so that they are ensured defense and indemnity if they are individually sued for the insurance company’s alleged bad faith claims handling or coverage declination? These open questions will create conflict and confusion in the attorney-client relationship between first-party insurers and their coverage counsel. Washington law has already substantially weakened the protections of the attorney-client privilege for pre-suit communications in the Claim File between a first-party insurer and its coverage counsel. See Cedell v. Farmers Ins. Co. of Wash., 176 Wn.2d 686, 295 P.3d 239 (2013); see also Richardson v. GEICO, 200 Wn. App. 705, 403 P.3d 115 (2017). The holding in Keodalah arguably further complicates and taxes the attorney-client relationship between first-party insurers and their coverage counsel.