Beware of bad-faith liability

Never known as an insurer-friendly venue, the state of Washington could potentially rewrite the law books to impose individual bad-faith liability on insurer adjusters. The decision could have a dampening impact on fraud investigations around the U.S.

The case is Keodalah v. Allstate Insurance Company. The chilling lower-court ruling exposes individual adjusters, investigators — and potentially any other insurer employee handling a claim — to the risk of being sued personally for violating the state’s bad-faith law. The fraud-fighting community should be concerned about the decision’s possible expansion to other jurisdictions.

The state’s Supreme Court agreed on Sept. 5 to review the case.

Motorcycle v. pickup truck

So how did we get here, and why? The story begins at a roadway intersection in April 2007. Keodalah stopped his pickup truck at a stop sign. He began pulling forward, when an uninsured motorcyclist struck his vehicle and injured Keodalah. The motorcyclist was killed. Keodalah had bought a $25,000 UM policy with Allstate. The Seattle Police Department found the motorcyclist at fault for traveling 70-74 mph in a 30-mph zone. It seemed like a low-low-exposure claim. The police report was in hand, and there was no evidence of fraud or fault by Keodalah.

The case gets murky at this point. Allstate also investigated. The insurer interviewed several witnesses who said the motorcyclist was traveling faster than the speed limit and was clearly at fault. Allstate hired an accident reconstruction firm. The firm’s report confirmed Keodalah was stopped at the stop sign, the motorcyclist was traveling at least 60 mph, and his “excessive speed” caused the collision. The police report, eyewitnesses, expert witness report and insured all agreed.

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The court decision

The lower court’s decision reported these negotiations: Keodalah asked Allstate to pay him the $25,000 limit of his UM policy, but Allstate refused. The insurer offered $1,600, assessing that Keodalah was 70% at fault. Keodalah asked Allstate to explain why, and the insurer increased its offer to $5,000. Allstate then offered Keodalah $15,000 to settle before trial. Keodalah stood firm, requested the $25,000 policy limit and sued. At trial, Allstate again contended Keodalah was 70% at fault. The motorcyclist was 100% at fault, the jury determined. It awarded Keodalah $108,868.20 for injuries, lost wages and medical expenses.

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Washington’s bad faith statute

Keodalah filed a second lawsuit after the jury verdict. He asserted bad faith by Allstate, and the adjuster personally. The trial court dismissed that count. Allstate may be liable, yet employees are immune from personal liability while acting in the course and scope of their employment, the court ruled.

The appeals court reached a different conclusion. The state’s bad-faith statute placed a duty of good faith on “all persons.” Individuals thus owe the same duties in claims handling as the insurer that employs them. The court broadly construed the law: “The code’s broad definition of ‘person’ includes both individuals and corporations and does not make any distinction between the duties they owe. Nothing in the statute…relieves individual insurance adjusters from this duty. The duty of good faith applies equally to individuals and corporations acting as insurance adjusters.”

With those words, Washington ushered in a world of bad-faith individual liability for insurer employees.

The Washington Supreme Court will decide Keodalah’s appeal. Expect major interest groups to intervene on both sides. Insurers will point to the chilling effect of personal exposure for their employees. Even if an insurer defends and indemnifies its employees, the lawsuit is a public record. It could damage their future employment prospects and credit rating.

Consumer advocates will point to how Allstate handled the claim, and the adjuster’s apparent willingness to assert positions not supported by the facts and claim investigation.

Equally, people entering the workforce may no longer view insurance claims as an attractive profession if they fear lawsuit exposure. The anti-fraud implications are also important. Will insurers pay suspect claims rather than challenge them and expose their employees to potential financial ruin? If so, honest policyholders will pay the price… figuratively and literally.

The Coalition Against Insurance Fraud is considering whether to file an amicus (friend-of-the-court) brief. The case could have negative implications for adjusters and fraud investigators. They could be sued and found personally liable for allegedly failing to properly investigate suspect claims. The Coalition also champions the right of policyholders to be treated fairly by insurers, and reminds insurers of their duty to pay legitimate claims promptly.

It is impossible to predict how the Washington Supreme Court will rule. Keodalah could usher in a new era of personal liability for insurer employees. Washington would be the first state to fall domino style, potentially leading to a personal liability nationwide. This could trigger a mass exodus of experienced adjusters and investigators who do not want to run the risk of being sued for bad faith.                                                                                                                                       

Whatever the outcome, the Keodalah ruling will remind all insurance professionals of their important duty, and to whom that duty is owed. An insurance policy is a contract. The duties of honesty, integrity and fair dealing rest on both sides of the insurance contract and claim process.

Matthew Smith is director of government affairs and general counsel for the Coalition Against Insurance Fraud. Contact him at matthew@insurancefraud.org.