Case Update: Kosovan v. Omni Insurance Company

Posted by Benjamin P. Melnick | Feb 08, 2022 | 0 Comments

In Kosovan v. Omni Insurance Company, the Washington Court of Appeals issued a consumer-friendly decision based on sound legal principles and public policy. A major takeaway of the case is that an insurance company cannot escape liability if it delegates its duties to its customers to a third party claims administrator who mishandles a claim, harming the customer. Since there is a lot of jargon in that statement, it is worthwhile to spend time unpacking what it all means.

The business of insurance is, at its heart, about collecting premiums in exchange for issuing policies to protect customers. When a customer has a problem that is covered by the policy, the insurance company evaluates and pays the claim. The claims process is handled by adjusters. In some instances, the adjusters work directly for the company, such as Pemco, Liberty Mutual, or Farmers. Other times, the insurance company will hire another company to administer claims, such as Gallagher Basset, Sedgwick, or Praxis. These companies are called a third party claims administrator.

Why would an insurance company have someone else take care of its customers?

To understand that is to get at the core of the issue before the court in Kosovan, and the central tension that exists in the business of insurance.

On the one hand, insurance companies are businesses, set up to make profits. Like all businesses, they owe duties to their shareholders to make sound business decisions to achieve those profits. Keeping costs down can be helpful to increasing profits. Outsourcing claims administration can be an effective cost-cutting decision for the business. 

On the other hand, insurance companies are quasi-fiduciaries, meaning they owe certain legal duties to their customers, namely the duty to treat their customers fairly. Carrying out those legal duties costs money, which reduces profits. If an insurance company breaches those legal duties, causing harm, its customers oftentimes have the right to file a lawsuit. A third party claims administrator does not have the same legal duties to an insurance company's customers as the insurance company.

But if the insurance company is not administering the claim, and the third party claims administrator, acting on behalf of the insurance company, causes a customer harm, what can a person do? 

Enter the Kosovan case. Kosovan sued her insurance company, Omni, claiming it breached certain duties it owed her. Her insurance company argued it was not at fault because it did not breach any duty to the customer since it did not administer the claim. She also sued the third party claims administrator, Praxis, which argued it was not at fault because it did not have the same duties as the insurance company. Both the insurance company and the third party administrator were right, in a sense, but that left the customer out in the cold, with no recourse for her harm.

The Court of Appeals sensed this injustice, and held that the insurance company was still responsible for the harm even though the harm was caused by the third party claims administrator. The insurance company was free to delegate the claims administration, but it could not delegate the duties it owed to its customers.

Score one for the consumer.

About the Author

Benjamin P. Melnick

Ben Melnick joined the firm in 2018. He graduated from Washington State University with a Bachelor's degree in 2010, and went on to earn his Juris Doctorate from Gonzaga University School of Law. In 2016, he was named as the Clark County Bar Association's Rising Star. His practice focuses on personal injury, auto accidents, biking accidents, wrongful death, and insurance disputes. Outside work, Ben likes spend time with his wife outdoors—mostly running, hiking, and skiing—and playing soccer.

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