Here at the Insurance Commando Blog, we recently received a favorable ruling from Judge Robart holding that extracontractual UIM claims are barred by the doctrine of res judicata when those claims are threatened, but not pled, in an underlying UIM valuation suit. This recent holding tracks a prior decision we obtained reaching the same conclusion: Smith v. State Farm, No. C12-1505-JCC, 2013 WL 1499265 (W.D.Wash. Apr. 11, 2013).
In this recent case of Zweber v. State Farm, –F.Supp.2d–, No. C14-0529JLR, 2014 WL 3900578 (W.D.Wash. Aug. 11, 2014), the insured sued State Farm in 2010 to establish the value of his UIM claim. Before the 2012 trial in this underlying action, the insured sent State Farm a demand letter claiming that State Farm would be acting in bad faith if it did not settle the case before trial. This demand letter threatened a subsequent bad faith suit if State Farm did not concede to the policy limit demand. State Farm took the underlying case to trial, and the insured received a jury verdict in excess of the UIM policy limits. State Farm promptly paid the policy limits. In 2014, the insured followed through with his threatened bad faith suit by filing a second suit against State Farm asserting breach of contract, Consumer Protection Act violations, Insurance Fair Conduct Act violations, and bad faith.
Based on the prior threat of this bad faith suit, we argued that res judicata was a complete defense to the 2014 suit. Res judicata, also known as claim preclusion, prevents the relitigation of claims and issues that were litigated, or could have been litigated, in a prior action. For res judicata to apply, there must be a final judgment on the merits in the underlying action and identity of (1) persons and parties; (2) cause of action; (3) subject matter; and (4) quality of persons between the first and second actions.
In Judge Robart’s opinion, he quickly found that factors one, three, and four were met. He then recognized that the second factor, whether there was identity of “cause of action” was the most hotly contested. Judge Robart analyzed several sub-factors relevant to the second factor and ultimately found an identity of cause of action. In doing so, the court held:
“The rights alleged to be infringed in each action are identical. Both actions directly involve Mr. Zweber’s claims for insurance benefits. Mr. Zweber argues that his rights were infringed when State Farm refused to pay him the money he was owed. This allegedly infringed right forms the basis for both actions even though one focuses on claims handling and the other on claim valuation. Mr. Zweber does not have a right to fair claims handling that is independent of his right to payment for a claim.”
. . .
The transactional nucleus of facts is the same in both cases. In both cases the claims are, at a fundamental level, based on State Farm’s refusal to pay Mr. Zweber the policy limits on his claim. In the first action, Mr. Zweber claimed that he was entitled to more benefits than State Farm was offering him. In the second action, Mr. Zweber claims that State Farm violated its various duties by refusing to acknowledge that he was entitled to more benefits than State Farm was offering him. In both cases, the basic behavior being complained of is the same: refusal to pay benefits in the requested amount.
After concluding that there was an identity of cause of action, the court held that the claims asserted in the insured’s 2014 complaint were barred by the doctrine of res judicata.
The holdings in Smith and Zweber demonstrate that the doctrine of res judicatacan be an effective tool to dismiss bad faith claims filed after an underlying UIM valuation claim. However, this doctrine has its limitations. If the insured was unaware of the bad faith claims during the prior litigation, then the doctrine may not apply. In both Smith and Zweber, the insured threatened a bad faith suit prior to the trial in the underlying action. Therefore, in Smith and Zweber, the doctrine of res judicata barred the subsequent bad faith suits.
