Washington Court of Appeals Highlights Limitations on Third-Party Standing to Bring Bad Faith and Statutory Claims Against Insurers
After her condo unit was damaged by fire and water, Gretchen Michels sued Farmers Insurance Exchange, her condominium association’s insurer, for bad faith and violations of the Washington Consumer Protection Act.
As required by the Washington Condominium Act, the condominium association had purchased the Farmers policy to provide coverage to unit owners for liability arising out of their interest in common elements in the building. As such, the condominium association was the named insured under the policy, with “insured” defined to include “each unit-owner of the described condominium, but only with respect to that person’s liability arising out of the ownership, maintenance or repair of that portion of the premises which is not owned solely by the unit-owner or out of that person’s membership in the association.” An endorsement confirmed that coverage extended to fixtures and improvements that were part of the building or structure and to permanently installed appliances in individual units. The policy specifically excluded coverage for the personal property of unit owners.
Farmers moved for summary judgment on Michels’s claims, arguing that she did not have standing because she was neither an insured under, nor a party to, the insurance contract; the trial court agreed. Michels appealed the trial court’s decision, arguing that (1) she was an insured under the Farmers policy because she was the “only real party in interest as to property she exclusively owned”; (2) she was a third-party beneficiary of the policy; and (3) she did not need to qualify as an insured in any event to bring a Washington Consumer Protection Act (“CPA”) claim.
With respect to her first argument, the appeals court found that, because of the plain language of the exclusion, Michels could not demonstrate that the policy contemplated paying unit owners directly for loss to their property and thus she was not an insured. Michels v. Farmers Insurance Exchange, 2019 WL 1531670 (Wash. Ct. App. 2019). As to Michels’s second argument, the court emphasized the rule that third party beneficiary contracts require an intent to assume a direct obligation to the purported beneficiary and found that Michels was unable to show that the condo association procured the policy with the intention that Farmers assume a direct obligation to Michels; indeed, the policy did not provide that Farmers would pay unit owners directly for any losses.
Michels’s CPA claim likewise failed because, although the statute does not require contractual privity for standing, when the alleged violations center on the insurer’s breach of its statutory duty to an insured, only an insured may pursue such a claim. Because Michels based her CPA claim on the insurer’s alleged violations of the Unfair Claims Settlement Practices Regulation (a regulation outlining an insurer’s duty to its insureds), and because she was neither an insured nor a third party beneficiary of the policy, her claim could not survive.