Washington Court of Appeals Breaks New Ground in Insurers’ Duties When Handling Third-Party Liability Claims Before the Insured is Sued

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SYNOPSIS

On July 5, the Washington Court of Appeals issued its decision in Tarutis v. Farmers Insurance, concerning an insurer’s duty to accurately adjust claims and settle within policy limits. The Court held that the insurer breached its duty of good faith and fair dealing by failing to attempt to settle a claim against its insured prior to suit being filed against the insured. It also held that the insurer’s subsequent tender of policy limits after suit was filed against the insured did not cure this breach. As a result, the insurer was exposed to liability far in excess of its policy limits.

THE FACTS

This bad faith action arose out of a tragic fire at a rental home owned by the insured that caused extensive burn injuries to a toddler. The fire was caused by a candle left unattended, but was not immediately detected because the house had no working smoke alarms, as required by law. Representatives of the toddler hired an attorney who contacted Farmers Insurance (“Farmers”) directly and made several demands, including information concerning policy limits. Farmers declined to provide the information and told the attorney that the insured was not negligent and that it was closing its file. Claimant’s counsel again requested insurance information, explained to Farmers the law concerning working smoke detectors, and informed Farmers that medical expenses were nearly $800,000. Although this amount was well in excess of the Farmers $100,000 policy limits, Farmers apparently did not communicate this information to its insured.

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