Washington: Third-Party Administrators and Adjusters Can Be Liable in Bad Faith Actions

On April 11, 2017, the Division III Washington Court of Appeals, on a 2 to 1 vote, held that third party administrators and adjusters can be liable in bad faith actions under multiple legal theories.  Merriman v. Am. Guar. & Liab. Ins. Co., No. 33929-7-III (Apr. 11, 2017). In Merriman, the storage warehouse owned by Bernd Moving Systems (“Bernd”) and its customer-owned contents, burned to the ground. Customers William and Colleen Merriman (“Merrimans”) lost contents worth over $300,000. Before the fire, the Merrimans had been assured by Bernd that their property would be fully insured. Following the fire, the insurer engaged an independent adjusting firm (“IA”) to adjust the claims for the fire and more broadly administer the entire review, adjustment, settlement, and payment process pursuant to a preexisting third-party agreement. In turn, the IA engaged an agent (“Local Agent”) as its local agent to handle the ground work.

Although the policy covered “[p]ersonal property of others in [Bernd’s] care, custody and control” and provided that “payment for loss of or damage to personal property of others will only be for the account of the owner of the property[,]” the IA instructed the Local Agent to tell customers there would likely be no coverage under Bernd’s policy and that they should file a claim under their own homeowner’s insurance. The Merrimans instituted an action against Bernd alleging its employee’s negligence caused the fire. Through discovery, the Merrimans obtained a copy of the policy and learned that it covered their loss. Consequently, the Merrimans amended their complaint and named the insurer, IA, and Local Agent as additional defendants. They alleged insurance bad faith, negligent misrepresentation, negligence, and violation of the Consumer Protection Act (“CPA”) and were granted class certification. Both the insurer and the Local Agent settled, and the IA successfully moved for and was granted summary judgment and class decertification.  The Merriams appealed.

The court first determined the Merrimans were insured under the policy, and then turned its attention to the extra-contractual claims.

The court rejected IA’s argument that a common law bad faith claim is only available against an insurer. In analyzing the merits of IA’s contention, the court read common law and statutes to broadly apply to “the business of insurance”, including an administrator and adjuster.

The court then rejected IA’s contention that the dismissal of the negligent misrepresentation and negligence claims was warranted because the Merrimans failed to demonstrate that IA owed a duty to them and other customers. In analyzing the merits of IA’s contention, the court noted that, in the context of business transactions, a party owes a duty to disclose “facts basic to the transaction, if [the party] knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.” The court also concluded that, because IA’s agreement and corresponding duties pursuant to it were intended to benefit the claimants, IA owed a duty to the Merrimans and other customers.

Finally, the court addressed the Merrimans’ CPA claim.  While the court rejected the argument that this was per se claim because of alleged Washington Administrative Code violations, it concluded that the Merrimans asserted a viable non per se CPA claim because they could still argue that IA’s failure to alert customers to available coverage was an unfair or deceptive act in trade or commerce.

Ultimately, the court reversed the trial court’s dismissal of the Merrimans’ claims as against the IA for insurance bad faith, negligent misrepresentation, negligence, and violation of the CPA. In remanding the case, the court instructed the trial court to reconsider its decertification decision.

The Merriman opinion was issued by one of Washington’s interim courts of appeal, and thus the case may make its way to the state supreme court.  Presently, those involved in the insurance industry—apart from insurers—may be subject to theories of liability commonly believed to apply exclusively to insurers—particularly, bad faith claims.