As I mentioned last week in Bad Faith Asserted by Excess Insurer, there are certain circumstances in which an individual or entity other than the policyholder can assert a bad faith claim against an insurance company. This situation recently arose before the Washington Court of Appeals in Unigard Ins. Co. v. Mutual of Enumclaw Ins. Co., 250 P.3d 121 (April 4, 2011) in an appeal regarding prejudgment interest, jury instructions and clean up costs.

The underlying case arose from Charles Engelmann’s purchase of property in 1979. The property had formerly been used as a dry cleaning facility. Mr. Engelmann later sold the property to Newmarket I, a general partnership. Years later, the Washington State Department of Ecology notified Newmarket that it might be liable for the release of hazardous substances at the property under the Model Toxics Control Act, Chapter RCW 70.105D. Based on the prospect of state enforcement, Newmarket entered into a voluntary clean-up program. An investigation of the property revealed soil and groundwater contamination. Newmarket incurred clean-up costs.

Newmarket then sued Mr. Engelmann and other former owners of the property for contribution. Mr. Engelmann tried to tender his defense to Mutual of Enumclaw Insurance Company (“Mutual”), the carrier of his homeowner’s policy during the time that he owned the property. Mutual denied coverage and refused to defend.

Left to deal with the claims on his own, Engelmann entered into a settlement agreement with Newmarket. He agreed to pay Newmarket $20,000 and to assign Newmarket all his rights against Mutual of Enumclaw. In return, Newmarket released Engelmann from all claims except to the extent they could be satisfied through the assignment of rights. Engelmann did not admit liability. The agreement expressly stated that the settling parties denied liability “for any and all claims related to the Site, the Facility and the Contribution Action.” Newmarket designated the rights it had obtained from Engelmann to its own insurer, Unigard Insurance Company. Unigard sued Mutual of Enumclaw for breach of contract, bad faith, and violation of the Consumer Protection Act. The parties each moved for partial summary judgment on the issue of liability. The trial court granted Unigard’s motion.

The properly executed assignment of rights enabled Newmarket to file a bad faith claim against an insurer that was not its own.

Please consider that the decision above is specific to the state of Washington. Other jurisdictions may rule otherwise.