The Washington Court of Appeals decision in Kosovan v. Omni Insurance Company, 2021 WL 4530640 (Wash. App. 2021), holds that a bad faith claim and a claim for violation of the Consumer Protection Act are both warranted when the PIP carrier attempts to subrogate its PIP payment before the insured is made whole. This case further illustrates that these are very treacherous times for subrogation in Washington and it appears there are no limits to which trial lawyers are not willing to travel down the anti-subrogation rabbit hole. The facts of the case are very straightforward, but they are important—because they are identical to just about every subrogation case you’ve ever seen or handled in Washington. They illustrate exactly what you can no longer do in the once great subrogation state of Washington.
On December 6, 2015, Kosovan was in a car accident and incurred $38,566.23 in medical expenses and received $10,000 in personal injury protection (PIP) benefits from his insurance company, Omni Insurance Company. The tortfeasor’s liability carrier, USAA, had $25,000 in liability limits, and accepted liability in the case. The Omni policy had subrogation language indicating that the insured must reimburse Omni if there was a third-party recovery, but only after the insured had been made whole. One week after Omni paid its PIP benefits, it hired Praxis Consulting, Inc., a subrogation vendor, to subrogate for and recover the benefits. Praxis did not independently investigate the extent of Kosovan’s alleged damages or whether the liability coverage would pay for all of Kosovan’s damages. Instead, Praxis relied on “direction and information received from Omni.” Praxis contacted USAA and confirmed that USAA had accepted full liability for the collision. Praxis then sent USAA a letter regarding Omni’s subrogation claim, which read as follows:
Our investigation of the accident referenced below indicates that liability rests with your insured. Your files should now reflect that we are handling this file. On behalf of our client we now turn to you for reimbursement under the provisions of the Personal Injury Protection Law for benefits and expenses incurred by them to date in the amount of $10,000.00. Please make your check payable to Praxis Consulting, Inc. A/S/0 OIC and forward to the address above.
Two weeks before the statute of limitations was set to expire, USAA offered its $25,000 policy limits to Kosovan. In the offer letter, USAA noted that it “received a PIP subrogation in the amount of $10,000.00,” and asked Kosovan to have Omni or Praxis fax a letter to USAA to get Omni or Praxis to waive the subrogation claim. Kosovan filed a notice to the insurance commissioner under the Insurance Fair Conduct Act (IFCA), R.C.W. § 48.30.015, asserting that Omni was improperly attempting to recover its subrogation claim directly from the tortfeasor. Kosovan then sued Omni and Praxis, arguing that they violated the Consumer Protection Act (CPA) and their actions were in bad faith because they sought to recover on their subrogation claim before determining whether Kosovan had been “made whole.” The trial court granted summary judgment for Omni and Praxis and Kosovan appealed. On appeal, the summary judgment was reversed and the court held that:
- Praxis did not owe Kosovan a duty of good faith and was not liable for unfair or deceptive trade practice under the CPA;
- There was a fact question regarding whether Omni had reasonable justification to hire Praxis to pursue subrogation;
- There was a fact question whether the Omni was vicariously liable for Praxis’ actions;
- Omni can be held responsible for a breach of the duty to exercise good faith in § 48.01.030 based on its own act of submitting the subrogation claim to Praxis for collection without ensuring that it had a right to recover the benefits it paid, and it can be held responsible for Praxis’ act in sending the subrogation claim letter to USAA.
This decision shakes Washington subrogation to its very bedrock. Every insurer or claims/subrogation professional who takes the time to read this newsletter article should immediately take notice that the quality of subrogation vendors/subrogation counsel they utilize could make the difference between being sued for bad faith (or worse) and effecting a subrogation recovery. Because the duty of good faith is non-delegable, Washington subrogation is probably best either left to subrogation lawyers who can navigate the minefield left behind after this decision or give up on subrogation in Washington altogether.
The law is clear: Omni did not have a right to recover PIP benefits it paid before it had been determined that Kosovan had been “made whole” for her losses. These made whole decisions represent the front line in a decades-old global war being waged by trial lawyers against the insurance industry’s rights of subrogation. They reduce subrogation in Washington to nothing more than a Potemkin village. Frustrated carriers may be tempted to simply throw up their hands and write off yet another state; but to do so would punish insureds and small businesses in Washington who will not even know that the cost of doing business or living in Washington has risen so that trial lawyers can make a larger fee.
Obviously, there should never be an effort to recover PIP directly from an adverse carrier, as OMNI and Praxis did in Kosovan, unless it’s clear that the insured’s bodily injury claim has been abandoned. It may be that OMNI and Praxis were confused since the accident happened in Oregon and the law is different there. But, of more practical concern is that this decision may be the expansive anti-subrogation interpretation and spin it gives to a Supreme Court decision barely two years old—Daniels v. State Farm Mutual Automobile Insurance Company, 444 P.3d 582 (Wash. 2019).
In Daniels, the court addressed whether the Made Whole Doctrine applied to property subrogation. Specifically, it addressed whether a first-party auto insurer, upon obtaining a partial recovery in a subrogation action, must reimburse its fault-free insureds for their full deductibles before any portion of the subrogation proceeds can be allocated to the insurer. The third-party liability carrier agreed that its insured was 70% at fault, and reimbursed State Farm for that portion of the total cost of the repairs. From these proceeds, State Farm reimbursed Daniels for 70% of her deductible. What could go wrong with such a responsible course of subrogation action by State Farm? Enter the trial lawyers. Lazuri Daniels sued State Farm and sought class action status, arguing that by failing to fully reimburse its insureds for their deductibles after recovering in a subrogation action, State Farm violated both Washington law and its own insurance policy. Daniels was a major expansion of the Made Whole Doctrine in Washington, expanding it unambiguously to deductible reimbursement and more broadly to property damage recoveries generally, where it had never applied before. Prior to this, it was doubtful that the Made Whole Doctrine applied at all to auto property/collision subrogation in Washington. The Court made clear that a fault-free insured must be reimbursed for its entire loss before an insurer may offset or recover its own payments. The case of Averill v. Farmers, 155 Wash. App. 114 (2010), which previously held to the contrary, is now bad law. Application of the Made Whole Doctrine to auto property/collision subrogation efforts is now clearly the law in Washington despite any contrary language in the insurance policy.
The clarion call coming from the courts in Washington is that carriers should tread lightly when considering pursuit of subrogation cases. It is now more important than ever that no auto property subrogation recovery be made or even attempted before confirmation that any and all of the insured’s personal injury damages are satisfied and made whole; and vice-versa. The Spanish philosopher George Santayana once said that “Chaos is the name we give order which produces confusion in our minds.” With that definition in mind, the Daniels and Kosovan decisions are responsible for about as much chaos as you can possibly throw into one state’s body of subrogation law. It would stand to reason, however, that if we can eliminate the confusion, you can also eliminate the chaos.