Washington Appellate Court Holds That an Insurer's Denial of Coverage Did Not Harm an Insured Who Was Protected by Bankruptcy
February, 2006
In Werlinger v. Clarendon National Ins. Co., 120 P.3d 593 (Wash. App.), a Washington appellate court held that an insurer (Clarendon) was not liable for bad faith or violation of Washington’s Consumer Protection Act because its insured (Michael Warner) was not harmed by Clarendon’s actions. Warner did not suffer harm because his personal liability was not in issue; he and his wife were both protected by Chapter 7 bankruptcy laws.
Facts
Warner and Dean Werlinger were involved in an automobile accident. Werlinger died at the scene, and his estate sued Warner for wrongful death. Warner was protected from personal liability due to a discharge in bankruptcy, but the bankruptcy court permitted the Werlingers to sue Warner for the $25,000 limits of his automobile insurance policy with Clarendon. Clarendon agreed to defend Warner pursuant to a reservation of rights. Clarendon then filed a declaratory judgment action against Warner and his wife, another named insured; the court in that action held the policy provided coverage. Clarendon then tendered its policy limits. The Werlingers rejected Clarendon’s tender; however, and proceeded with the wrongful death litigation against Warner.
The Warners and the Werlingers later entered a settlement agreement. In exchange for the Warners settling for $5 million, the Werlingers agreed not to hold the Warners personally liable. The parties agreed to a judicial determination of whether the settlement was reasonable. The court found the settlement agreement to be unreasonable because the Warners “were not exposed to any personal liability due to their discharge in the Chapter 7 bankruptcy.” The Werlingers, as Warner’s assignees, then initiated bad faith litigation against Clarendon. On motions for summary judgment, the court ruled in favor of Clarendon because there was no injury to Michael Warner or his marital community. The appellate court affirmed.
Analysis
In Washington, a bad faith claim and a claim under the Consumer Protection Act are both considered torts. “Just as any other tort, the insured must prove duty, breach of duty, and damages proximately caused by any breach of duty. Harm to the insured is an essential element of every bad faith or CPA [Consumer Protection Act] claim.” Here, the court found that the Warners never experienced any harm: “[t]he Warners suffered no harm as a result of Clarendon’s actions. They were shielded from personal liability by their Chapter 7 bankruptcy status.” Therefore, even though Clarendon chose to defend Warner under a reservation of rights, and only tendered its policy limits after a court found coverage existed, “Clarendon established there was no harm.” Due to Warner’s bankruptcy status, “at no time was he subjected to greater liability because of Clarendon’s alleged delay in resolving the issue of coverage.”
Learning Point:
In Werlinger, the Washington appellate court focused on the status of the insured, rather than on the actions of the insurer, in rejecting bad faith and Consumer Protection Act claims. The Supreme Court of Washington has denied the Werlingers’ petition for review. Thus Werlinger, and its willingness to look at the status of the insured to analyze whether an insurer’s conduct was appropriate, states the law in Washington and may be cited as persuasive authority elsewhere. •
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