In Coventry Associates v. American States Insurance Company, 136 Wn.2d 269, 961 P.2d 933 (1998), our Supreme Court clarified several issues which have troubled bad faith litigators. These include the relationship of the Washington Consumer Protection Act and common law bad faith, whether bad faith can exist independent of coverage, and what remedies are available in a first party bad faith case. The heart of the opinion, however, addresses fundamental aspects of first party coverage. For the first time in many years, the Court has redefined the relationship between insured and insurer in first party claims.

The opinion does not directly address PIP issues, but draws no distinctions between first party property and medical coverages. It provides no reason to distinguish or limit its holding to property claims.

Coventry arose from a landslide. The insured was constructing an apartment complex in Renton. Heavy rains caused a mudslide to damage a retaining wall. After a brief investigation, American States denied coverage. The Court described the insurer’s investigation:

An American States adjuster briefly investigated the project site, determined the damage was to the retaining wall, and denied the claim because Coventry's policy had an exclusion for damage to that structure. The adjuster did not investigate the cause of the damage or any loss of business coverage because he did not believe that Coventry had a claim for business loss. The adjuster did not investigate damage to the construction project other than that to the retaining wall. The adjuster admitted he looked only at two of the six forms comprising Coventry's policy before he denied coverage. The adjuster later testified he never considered whether Coventry had a business loss claim even though it had some business loss coverage.

Coventry v. American States Ins. Co., 136 Wn.2d 269, 274, 961 P.2d 933 (1998). American States won a summary judgment of no coverage. The Court of Appeals affirmed. Coventry Assoc. v. Am. States Ins. Co., 86 Wn. App. 845, 939 P.2d 1245 (1997).

For purposes of the appeal, Coventry admitted that the policy did not cover the loss, and American States conceded it acted in bad faith in investigating the claim. Id., at 136 Wn.2d 275. Absent coverage, argued the insurer, what duty was owed to Coventry?

Justice Johnson framed the issue as whether a first party insured has a cause of action for bad faith investigation in Washington. Id., at 277. The Court answered in the affirmative:

We hold an insured may maintain an action against its insurer for bad faith investigation of the insured's claim and violation of the CPA regardless of whether the insurer was ultimately correct in determining coverage did not exist. An insurer's duty of good faith is separate from its duty to indemnify if coverage exists. This result creates no insurmountable burden on the insurer. The insurer is only required to fulfill its contractual and statutory obligation to fully and fairly investigate the claim. The problem arises when the insurer fails to investigate, in bad faith, thereby placing the insured in the difficult position of having to perform its insurer's statutory and contractual obligations.

Id., at 279. Put another way, if the insurer fails to conduct a good faith investigation, it is liable for the insured’s expenses in conducting an investigation. Whether the claim eventually turns out to be covered is irrelevant – the carrier’s duty to investigate in good faith is independent of coverage.

How does Coventry influence PIP adjustments? Typically, we see no significant investigation in PIP claims at all. The PIP adjuster goes through the following steps:

1. Acknowledges claim and sends out PIP application.

2. Receives bills and claims for wages and services.

3. Pays early medical expenses. Delay wage claim.

4. Reviews medical records.

5. When treatment (especially chiropractic) exceeds some level, demands an examination. Often advises the insured that the adjuster will be "guided" by the result of the examination.

6. Pays or denies further treatment based on the examination results. May even deny pending bills for past treatment.

The "good faith" investigation, then, amounts to reviewing medical records and obtaining an examination. The PIP adjuster never seems to consult with the insured, or with the insured’s providers. The adjuster does absolutely nothing to investigate beyond accepting the examiner’s opinion and ignoring all others. Is this a good faith investigation? Does the insured deserve better?

Answers may be found in claim manuals. Many insurers set out guidelines for handling difficult claims, and the guidelines are seldom followed. Typically, they instruct the adjuster to meet with the insured in person, to help evaluate the injury and the impact it has on the insured. State Farm’s claim guide suggests that the adjuster meet in person with a provider to discuss the treatment and ask questions. When have we seen an adjuster do that?

Modern PIP adjusting practice simply fails to rise to the level required by Coventry. Our Supreme Court sees an insurer’s first party claim investigation as a process which benefits both the insured and the insurer – an evenhanded, fair, balanced investigation.

An insurer’s duty to investigate arises, says the Court, not from any adversarial role between the parties, but from the fiduciary relationship between insured and insurer. Insureds pay for and deserve good faith treatment and fair investigation. The Court pointed out in a footnote:

As the Arizona Supreme Court noted in Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986), the insurance industry itself lends credence to the fact the insureds seek more than a bare promise to pay certain claims. "Advertising programs portraying customers as being 'in good hands' or dealing with a 'good neighbor' emphasize a special type of relationship between the insured and the insurer, one in which trust, confidence and peace of mind have some part." Rawlings, 151 Ariz. at 155 n.3.

Coventry, at 283, fn. 5. Given that underpinning, and the rule that the insurer must give the insured’s interest equal consideration to its own, Tyler v. Grange, 3 Wn. App. 167, 173, 177, 473 P.2d 193 (1970), how should claims investigation impact the claims decision? A hypothetical follows.

Chiropractor A is the insured’s treater. She knows her patient well, having seen him twice a week for four months. Progress is slow, but steady. Chiropractor A sees a need for further treatment. Chiropractor B was hired by the insurer to conduct an examination. After an interview and an exam which took less than an hour, Chiropractor B says no further treatment is necessary. The adjuster has not investigated beyond the paper file, having never laid eyes on any of the people involved. Further treatment is denied. Has the carrier committed bad faith?

Under Coventry, the first question is whether the insured has received the benefit of a good faith investigation. The second question is whether the adjuster gave equal consideration to the insured’s interest, both in planning the investigation and in making the claim decision. The answers to both are obvious. If you see the insurer-insured relationship as one of trust and service, rather than as hostile adversity, it becomes clear that the modern PIP claim is nearly always handled in bad faith.

Some claims professionals will say that the "independent" physician conducted part of the investigation for the insurer. At deposition, however, the carrier’s examiner will admit no knowledge of the policy, the claims process, or the Fair Claims Practices Regulations (WAC 284-30). Is it good faith for the carrier to delegate the investigation to a physician or chiropractor? If the carrier obtains an exam, must it search for a truly objective examiner? The Court in Coventry sees an insurer’s investigation as something the insured has purchased with premium dollars. Since investigation is a benefit to the insured, it must be accomplished with the insured’s welfare in mind:

When an insurer fails to adequately investigate an insured's claim, the insured must either perform its own investigation to determine if coverage should have been provided or take no action at all. In either situation, the insured does not receive the full benefit due under its insurance contract.

Id., at 282.

We are accustomed to the adversary system, and all its trappings. Coventry says first party claims should be handled in good faith, and good faith means fair, balanced and without adversariness. The most basic claims decisions won’t bear close scrutiny. Why did the insurer pick Chiropractor B for the exam? Is he fair? Has he often sided with the insurer? Laying aside the adversary method of resolving claims opens a world of opportunity for the insured.

Remedies and Damages

Harm to the insured is an essential element of either a bad faith claim or CPA violation. In Coventry, the insured argued for coverage by estoppel or a partial return of premium. The Court, however, focused on the actual harm suffered by the insured:

The record establishes that Coventry incurred certain expenses as a result of American States' bad faith investigation. For example, Coventry hired geotechnical and civil engineers to review the facts and circumstances surrounding the incident causing damage to the construction site. Coventry also hired insurance experts to determine if coverage was denied in bad faith. To the extent Coventry can establish it incurred expenses as a direct result of American States' breach of contract and bad faith actions, it was harmed.

Coventry v. American States Ins. Co., 136 Wn.2d 269, 283, 961 P.2d 933 (1998). The Court was also unwilling to presume harm, leaving the burden of proof with the insured. Using tort analysis, the Court held:

We hold Coventry is not entitled to coverage by estoppel or a return of a portion of its premium but that its damages are limited to the amounts it has incurred as a result of the bad faith investigation, as well as general tort damages. The record before us establishes that Coventry was required to go through some financial expense as a result of the bad faith investigation conducted by American States. These expenses include the cost of hiring their own experts and investigators to determine if American States should have covered the claim. To that extent, Coventry is entitled to make a claim for those amounts and damages normally associated with bad faith and CPA violations. Coventry must, like every other plaintiff, establish those damages at trial.

Id., at 285. The mention of "general tort damages" is important, as it resolves an issue never directly addressed in prior cases. Note that Fisons, which doesn’t allow general damages in CPA cases, is not overruled. See Washington State Physicians Ins. Exch. & Ass'n v. Fisons Corp., 122 Wn.2d 299, 329, 858 P.2d 1054 (1993).

A few days after Coventry was decided, the Court of Appeals decided State Farm Fire and Casualty v. Kiniry, #39212-3-I (Slip Opinion, September 14, 1998). Although Kiniry was a CPA case brought by an insurer, rather than an insured, the Court’s comment on damages is helpful.

The final element of the CPA claim is whether Kiniry's false reports and phony billing statements caused injury to State Farm in its business or property. State Farm incurred expenses for experts, interpreters, transcribers, attorneys, and its own employees during its investigation of Kiniry's reports and billing statements. Thus, the evidence supports a verdict by a preponderance of the evidence that Kiniry violated the CPA by submitting either the false reports, the phony billing statements, or both.

Id., at 18. The mention of attorney fees is important. Contrast the holdings in Sign_O_Lite Signs v. DeLaurenti Florists, 64 Wn. App. 553, 825 P.2d 714 (1992), and St. Paul Ins. Co. v. Updegrave, 33 Wn. App. 653, 656 P.2d 1130 (1983).

In a PIP claim, then, the insured who suffers a bad faith investigation is entitled to damages for the expenses necessary to properly investigate and determine whether medical expenses are covered by the policy. These should include fees of experts, investigators, and attorneys hired by the insured. The insured is entitled to an award of general damages under the common law bad faith count, as well as any other damages proximately caused by the insurer’s conduct.