National Insurance Law Forum

National Insurance Law Forum

Published By The Attorneys of the National Insurance Law Forum

West Hills Development Company v. Chartis Claims, Inc., et al., 273 Or App 155 (2015)

Posted in Duty to Defend

In the recent case West Hills Development Company v. Chartis Claims, Inc., et al., 273 Or App 155 (2015) (“West Hills”), the Oregon Court of Appeals provided further guidance to Oregon insurers on their handling of tenders of defense from parties who contend that they are additional insureds. In particular, the court addressed the scope of an exception to the four-corners rule. The four-corners rule generally limits an insurer’s determination of the duty to defend inquiry to the facts alleged in the underlying complaint. The exception, which has only recently been recognized in Oregon, allows the consideration of facts not alleged in the complaint when the issue is whether the tendering party has the status of an insured under the insurance policy, as opposed to the issue of whether liability for the insured’s conduct is covered. In West Hills, the court explained that such extrinsic facts need not rise to the level of “evidence” that would be admissible in court. Instead, the court held that, where a tender letter contained the tendering party’s representations of information that was relevant to the issue of whether the tendering party was an additional insured, and the insurer could readily verify that information, that information was sufficient to establish additional insured status.

West Hills involved a general contractor involved in the construction of townhomes. The townhome owners association brought a lawsuit against the general contractor, alleging that the general contractor negligently supervised its subcontractors, and that there was inadequate weatherproofing at wood posts. The general contractor was expressly designated in its subcontractor’s insurance policy as an additional insured, but only for liability arising from the subcontractor’s ongoing operations performed for the general contractor.

Asserting additional insured status under that provision, the general contractor tendered the complaint to the subcontractor’s insurer. The complaint did not mention the subcontractor, and as such, contained no facts necessary to establish additional insured status because it contained no facts to show that any of the general contractor’s liability arose from the subcontractor’s work for it. However, in its tender letter the general contractor reported that the subcontractor performed work for the general contractor that was described in the complaint. The insurer denied the tender.

The insurer argued to the Court of Appeals that information about the subcontractor’s work was not extrinsic “evidence” that could be considered in determining whether the insurer had a duty to defend, because they were arguments that would not be considered as “evidence” at trial. The Court of Appeals rejected that argument, explaining that the existence of duty to defend did not depend upon whether facts from outside the complaint met any evidentiary standard. Instead, it was enough that the tender letter’s report that the subcontractor had been involved in the construction put the insurer on notice that that its duty to defend was at issue, particularly in light of the fact that that the insurer could readily verify the reported information. The court, however, did not say that the insurer had to accept the information as true.

The court, however, did not resolve the parties’ dispute regarding the meaning of the additional insured provision’s limitation of “liability arising out of [the subcontractor’s] ongoing operations.” The insurer had argued that phrase meant that in order for coverage to apply, property damage must occur while the subcontractor was still on the job. The general contractor argued that phrase to provide broader coverage for any liability for property damage that arose from the subcontractor’s operations, even if such damage occurred after the subcontractor completed its work and left the job.   The court held it unnecessary to decide that issue, because the allegations of the complaint pleaded the possibility of damage occurring within the narrower meaning offered by the insurer. The issue of the meaning of the “ongoing operations” limitation will continue to be litigated before Oregon trial courts until the Court of Appeals resolves it.

Finally, the West Hills decision provides no guidance on the related issue of whether an insurer who provided additional insured coverage limited to the subcontractor’s “ongoing operations” may rely upon evidence from outside the complaint to show that the subcontractor did not conducted any relevant operations during the policy period, in order to deny the duty to defend.



Client Questions Regarding Settlement

Posted in Practice and Procedure, Uncategorized

In working to settle coverage actions, insurers often seek to include non-monetary terms in a settlement that insureds may resist.  Such non-monetary terms often are as hotly debated as the amount of money to be paid.

Insurers often seek to include an indemnity term in a settlement whereby the insured must indemnify the insurer against future claims. Despite resistance from insureds, an indemnity provision is important because some states, like Oregon, allow claims for contribution by non-settling insurers against settling insurers under certain circumstances.  Certain Underwriters v. Mass. Bonding and Ins. Co., 235 Or. App. 99, 230 P.3d 103 (2010).  In addition to potential claims by non-settling insurers, complicated claims often involve situations where one or two parties are left standing for trial.  Depending on the nature of the settlement, indemnity could be necessary to prevent a direct action.

Insurers sometimes also seek policy buy backs, but a buy-back may not be available in states like Washington.  See, RCW 48.18.320.  One way around this issue is to include the underlying claimant in the settlement.  This alternative is often not practical in environmental claims where one of the “claimants” could be the federal or state agency guiding the remediation.  If the settlement also includes a release of future claims, that may be enough given that the injured party could only pursue the insurer through the insured, and the insured’s release of the insurer should be effective.  The statute should be limited to situations where there is a cancellation or annulment, which should not be considered the same as a release of insurance liability for a particular claim.

Some courts will also allow the entry of a claims bar order as part of a finding that a settlement was reasonable.  See, e.g., Cadet Mfg. Co. v. Am. Ins. Co., Case No. 04-5411, docket no. 245 (W.D. Wash. March 30, 2006).  Upon proper notice to other parties, the claims bar order can be more effective than indemnity, since it does not depend on the financial ability of the indemnitor to provide the promised indemnity. 


Insurers (in some situations) can directly sue independent counsel for reimbursement

Posted in Duty to Defend

The California Supreme Court in Hartford Casualty Insurance Company v. J.R. Marketing, L.L.C., 190 Cal. Rptr. 3d 599 (Cal. 2015), has held an insurer has the right to seek reimbursement of unreasonable and excessive attorneys’ fees directly from the insured’s independent counsel, which firm “provide[d] no convincing reason why they should be absolutely immune from liability for enriching themselves” by collecting such fees.

This decision has its roots in the general proposition that an insurer with a duty to defend has an obligation to pay reasonable and necessary defense costs.  See Aerojet Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38 (1997).  In California, by statute (Calif. Civil Code section 2860), an insured has the right to select its own counsel (referred to as “Cumis” or independent counsel) if there is a conflict of interest between insurer and insured because of the particular rights the insurer reserves.  Section 2860 mandates that fee disputes involving independent counsel’s rates and fees are to be arbitrated.  Further, under Buss v. Super. Ct., 16 Cal. 4th 35 (1997), the insurer has the right to seek reimbursement from its insured of fees not covered by the policy.

In the case before California’s highest court, the insurer was late in its decision to defend and did not recognize the insured’s right to independent counsel.  However, the “breaching” insurer was still permitted to seek recovery of amounts it had overpaid (because unreasonable and excessive) based on an Order entered in the case which allowed for this right but did not specify against whom the insurer could seek that reimbursement.  The court held that, based on the circumstances and the equities, the right of reimbursement could be pursued against the independent counsel.  While limited to its facts, this decision is consistent with the general rights in California of an insurer who defends, to seek reimbursement on the back end so as not to be paying more than it agreed to insure.


In this case, the insurer (Hartford) initially refused to defend its insureds against various lawsuits. The insureds sued Hartford, which then agreed to defend, but refused to pay for independent counsel.  The trial court granted the insureds summary judgment, ruling Hartford was required to defend and pay for independent counsel (Squire Sanders, now known as Squire Patton Boggs). The trial court entered a subsequent order (drafted by Squire Sanders and approved by the court) enforcing Hartford’s duty to defend, ordering Hartford to pay all past and future attorneys’ fees, and prohibiting Hartford from relying on the rate provisions of California Civil Code section 2860(c) because Hartford initially breached the duty to defend. However, the Order also expressly reserved Hartford’s right to seek reimbursement of unreasonable and unnecessary legal charges after the underlying lawsuits had concluded.

After the underlying actions resolved, Hartford cross-complained against the insureds and Squire Sanders, alleging that law firm had “padded” its bills. Squire Sanders filed a demurrer on the basis that the claim for reimbursement could not be maintained against the law firm (only the insured).  The demurrer was sustained by the trial court and affirmed on appeal.

The Supreme Court’s Holding

The California Supreme Court reversed, holding that, when an insurer is ordered to pay all fees billed by independent counsel with only a post-litigation right to challenge unreasonable billings, the insurer has a right to seek post-litigation reimbursement directly from independent counsel.

The court rejected Squire Sanders’s contention that it was immune to restitution claims because it was merely the incidental beneficiary of Hartford’s duty to defend its insureds. Squire Sanders was not an incidental beneficiary because Hartford only had an obligation to pay defense costs and was seeking reimbursement to the extent those defense costs were unreasonable, and the law firm under the terms of the Order it obtained and, indeed, drafted, had submitted bills to Hartford and obtained payment subject to the express provision that such bills must be reasonable, and that Hartford could later obtain reimbursement for unreasonable charges.

The court also rejected Squire Sanders’s argument that a dispute over fees affects independent counsel’s judgment and loyalties, frustrating public policy. In doing so, the court noted that attorneys represent their clients in numerous settings where they have to later justify their fees to third parties (e.g., class-action settlements, bankruptcy).  Moreover, arbitration under Section 2860(c) specifically addresses disputes over independent counsel’s fees and provides for resolution of those disputes. Finally, the court dismissed Squire Sanders’s argument that any financial responsibility for the allegedly excessive billing should fall first on the firm’s clients, noting that insureds that pay to receive a defense of potentially covered claims, do not expect to face additional rounds of litigation and possible monetary exposure due to the conduct of their lawyers.

This holding, the court indicated, was limited to the unique procedural history of the case before it. The trial court’s enforcement Order permitted Hartford to pursue reimbursement from someone, and that someone includes Squire Sanders. Thus, the issue before the court was whether – assuming Hartford may seek reimbursement of unreasonable charges after the underlying litigation has concluded – that claim may be made directly against independent counsel. The court noted that it need not and did not decide whether, absent such an order, an insurer that breaches its defense obligations has a right to recover (from independent counsel or the insured) unreasonable fees it paid independent counsel.

The court expressly declined to address the issues of: (1) whether, absent the enforcement order’s express provision authorizing Hartford to seek reimbursement for excessive fees, an insurer that breaches its defense obligations has any right to recover excessive fees it paid independent counsel; (2) whether a dispute over allegedly excessive fees is more appropriately decided through a court action or through Section 2860 arbitration; and (3) when fee disputes ought to be decided relative to the underlying litigation.  The decision also does not address an insurer’s rights when there has not been any breach of the duty to defend and that insurer pays more than reasonable and necessary defense costs, reserving its right to get money back after the case is over.

Hawai’i declines to adopt Cedell, for now . . .

Posted in Uncategorized

It has been more than two years since Washington’s Supreme Court issued its opinion in Cedell v. Farmers Ins. Co. of Washington, 176 Wash.2d 686, 295 P.3d 239 (2013), radically changing the attorney-client privilege for insurers in Washington.

In Cedell, the court held that there is a presumption of no attorney-client privilege in “first party insurance claims by insured’s claiming bad faith in the handling and processing of claims, other than UIM claims.” Id. at 700. The insurer “may assert an attorney-client privilege upon a showing in camera that the attorney was providing counsel to the insurer and not engaged in a quasi-fiduciary function.” Id. However, the insured may still be entitled to “pierce the attorney-client privilege” by asserting the crime fraud exception. Id.

While the Cedell opinion has been cited by a number of federal courts in Washington, its application still may not be clear. As one district court observed, “the opinion creates rather than alleviates confusion about what must be produced, and under what circumstances.” Philadelphia Indem. Ins. Co. v. Olympia Early Learning Ctr., 2013 WL 3338503, at *3 (W.D. Wash. July 2, 2013). Nevertheless, a federal district court in Idaho adopted Cedell, Stewart Title Guar. Co. v. Credit Suisse, Cayman Islands Branch, 2013 WL 1385264 (D. Idaho Apr. 3, 2013), leading many across the country to wonder whether their states are next.

In Hawai’i, this question has been answered, at least for now. In Anastasi v. Fid. Nat. Title Ins. Co., 134 Haw. 400, 341 P.3d 1200, 1216-17 (Ct. App. 2014) cert. granted, 2015 WL 3384471 (Haw. May 22, 2015), an insured asked the Intermediate Court of Appeals of Hawai’i to adopt Cedell. The court specifically declined the invitation, observing that the statutory provision setting out the attorney-client privilege in Washington “is fairly limited,” whereas in Hawai’i it has been “codified in much more detail.” Id. at 416-17. The Court concluded that “[t]he rule adopted in Cedell is inconsistent with the privilege as codified in Hawai‘i.” Id. at 417.

Now that the Supreme Court of Hawai’i has accepted review in Anastasi, the Cedell decision could potentially be addressed by Hawai’i’s highest court. This is not guaranteed, however, as the holdings of Anastasi were not limited to the application of the attorney-client privilege. Both the insured and the insurer petitioned for review, the Court of Appeals having vacated the grant of summary judgment in the insurer’s favor. That being said, if Cedell is addressed, Hawai’i will not be the only state listening.


Breach of the Duty To Cooperate or Not…

Posted in Auto Liability Coverage, Duty to Defend, Recent Cases

The Illinois Supreme Court has recognized that a cooperation clause prevents collusion between the insured and injured and enables an insurer to prepare its defense to a claim. M.F.A. Mutual Ins. Co. v. Cheek, 66 Ill. 2d 492, 496 (1977).  It has also acknowledged that: “Any condition in the policy requiring cooperation on the part of the insured is one of great importance, and its purpose should be observed.”  Waste Management, Inc. v. International Surplus Lines Ins. Co., 144 Ill. 2d 178, 191 (1991).  As recently addressed in American Access Cas. Co. [“AACC”] v. Farid Allassouli, No. 1-14-1413 (IL Appellate Court, April 29, 2015), the insurer usually has little or no knowledge of the facts surrounding a claim, while the insured has knowledge of the facts. Thus, the insurer depends on the insured for fair disclosure. The cooperation clause “obligates the insured to disclose all of the facts within his [or her] knowledge and otherwise to aid the insurer in its determination of coverage under the policy.” Id. (citing Waste Management).  Thus, when AACC tried unsuccessfully to obtain information about an automobile accident from its insured, AACC sought to be relieved of its duty to defend or indemnify its insured, due to the insured’s failure to cooperate.

To establish a breach of the cooperation clause, the insurance company must show that it exercised a reasonable degree of diligence in seeking the insured’s participation and the insured’s failure to participate was due to a refusal to cooperate.   And, if the insurance policy at issue in an automobile policy, an insurer cannot be relieved of its duty  unless  it can show that the insured’s refusal to cooperate in its investigation caused it substantial prejudice.  This is because automobile policies abound with public policy considerations.  Thus, courts have held they should afford affected members of the public-innocent third persons—”the maximum protection possible consonant with fairness to the insurer.” Cheek, at 500.

To establish substantial prejudice, the insurer needs to show the insured’s violation of the cooperation clause hampered its investigation. The Illinois Appellate Court held that AACC failed to present evidence that: (1) it acted with reasonable diligence to secure Alassouli’s cooperation in its investigation; (2) Alassouli’s failure to cooperate was willful; or (3) Alassouli’s breach of the cooperation clause substantially prejudiced it.

On the first issue, the Court observed:

-An AACC claims adjuster, Cary Loseau, called Alassouli to clarify the facts surrounding the accident and obtain necessary information regarding the events leading up to the accident. Alassouli answered the call and identified himself. But once Loseau told Alassouli that AACC would be recording his statements, Alassouli hung up.

-Loseau immediately placed another call that went to voicemail, left a “detailed message regarding the need for additional information and informed Alassouli of the importance of returning the call.”

-Five days later, AACC called Alassouli at the same number, leaving a message with his roommate, who promised that he would have Alassouli return the call. Alassouli never called back.

-AACC made two more phone calls, leaving messages, but again, no response from Alassouli.

-AACC then conducted a skip trace that revealed nothing about Alassouli’s whereabouts.

AACC then  filed a declaratory action against Alassouli and Benson, the claimant,  seeking to be relieved of its duty to defend indemnify Alassouli.   Alassouli failed to appear or answer, and the trial court entered a default order against him. Benson filed a summary judgment motion, supported by affidavits of witnesses to the accident.  The witnesses testified that Alassouli attempt to make a left turn in front of Benson without properly yielding, causing Benson to make an evasive maneuver to avoid hitting Alassouli. In evading Alassouli’s car, Benson collided with the front end of Sader’s car.

AACC  filed a cross-motion for summary judgment. AACC attached affidavits from AACC claims adjuster and Gunther Polak, the private investigator retained to locate Alassouli about two years after the incident.

The Appellate Court found a lack of reasonable efforts and diligence on the part of AACC to locate the insured, noting that  unlike the insured in  American Country Ins. Co. v. Bruhn, 289 Ill. App. 3d 241 (1997),  Alassouli did not explicitly refuse to give a statement to AACC, nor was his refusal recorded. Instead, Alassouli hung up the phone and failed to return the calls. The Court also contrasted AACC’s efforts with the “dynamic efforts” in  Founders Insurance Co. v. Shaikh, 405 Ill. App. 3d 367 (2010).   The court held,  as a matter of law, that  five attempted phone calls and a skip trace in the matter of less than two weeks and nothing more until a declaratory judgment petition is on the line does not suffice to claim an insurer used reasonable diligence to secure the insured’s cooperation.   The court noted that  AACC made no attempt to visit Alassouli’s known address or send any letters via mail or conduct an ongoing effort to talk to or find Alassouli. Also unlike Shaikh, AACC’s attempt to seek Alassouli’s cooperation was slight, and cannot be characterized as having gone “cold.” Instead, AACC summarily concluded that Alassouli refused to cooperate after not returning phone calls after a lapse of 13 days.  The Court posited: “Moreover, if AACC’s skip trace revealed no new phone numbers or addresses, why wouldn’t AACC have then visited the known address or send letters seeking his cooperation?”  The court concluded that AACC’s efforts were wanting and deficient.   It found that there was no evidence that the insured was aware that he had a duty to cooperate and then willfully refused to comply.  “His failure to cooperate can as easily be attributed to lack of notice as to what was expected from him.”

On the issue of substantial prejudice, AACC argued:

(1)  that it is difficult for “insurers to show prejudice because with a substantial failure to cooperate, an insurer would never know precisely what information it could have had;   (2)  it had no obligation to show the loss falls within the terms of the policy because that was Alassouli’s obligation.  (3) it need not find information concerning the accident from other sources, because only the insured is a party to the contract at issue.

The court was unpersuaded.  It found that AACC could not prove substantial prejudice in its investigation because it failed to conduct a proper investigation.  AACC had notice of the accident shortly after it occurred and had access to information about the accident, including the police report.   The inadmissibility of police reports had no bearing on whether AACC could obtain information from it for purposes of investigating its potential liability for the accident. The report contained a narrative of the accident, a list of the individuals involved in the accident, license plate numbers and vehicle models, any citations or arrests for the accident, and potential witnesses. AACC only sought information from Alassouli and summarily denied coverage based on its inability to receive information from him, despite the availability of alternative sources of information.

The Duty to Indemnify When The Insured Settles: Who Has The Burden of Proof?

Posted in Duty to Indemnify

When an insured’s liability is established at trial, the duty to indemnify is based on the facts proven at trial.  Ledford v. Gutoski, 319 Or. 397, 403, 877 P.2d 80, 84 (1994).  However, when the insured enters a settlement, the duty to indemnify is determined on the facts that form the basis for the settlement.  Bresee Homes, Inc. v. Farmers Ins. Exch., 353 Or. 112, 126, 293 P.3d 1036, 1044 (2012).  Unlike a trial, a settlement agreement may not be documented by a transcript of proceedings or pleadings.  Accordingly, determining coverage for liability incurred in a settlement can present a unique challenge, which raises the question of whose challenge it is.

Oregon law courts have long placed the initial burden of proving coverage on the insured.  Lewis v. Aetna Insurance Co., 264 Or. 314, 316, 505 P.2d 914 (1973).  Nevertheless, insureds in Oregon have attempted to shift this burden to insurers where coverage is sought for a settlement.  See, e.g., American Medical Response Northwest., Inc. v. ACE Am. Ins. Co., 31 F.Supp.3d 1087, 1097 (D. Or. July 10, 2014).  In American Medical, the federal district court observed that “Oregon courts have not addressed which party bears the burden of proof to apportion a settlement that encompasses both covered and non-covered claims.”  Id.

Some jurisdictions place the burden of this apportionment on the insurer if it wrongfully denies the duty to defend.  See, e.g., Sentinel Ins. Co. v. First Ins. Co. of Hawai’i, 76 Haw. 277, 297, 875 P.2d 894, 914 (1994) (“[W]here the insured seeks indemnification after the insurer has breached its duty to defend, (1) coverage is rebuttably presumed, (2) the insurer bears the burden of proof to negate coverage, and (3) where relevant, the insurer carries its traditional burden of proof that an exclusionary clause applies.”).  However, the basis for the reallocation of this burden may not be consistent with Oregon law, under which “the duty to defend is different from the duty to indemnify, and the breach of one does not, in and of itself, establish the breach of the other,” and “the duty to indemnify cannot be extended by estoppel.”  Nw. Pump & Equip. Co. v. Am. States Ins. Co., 144 Or. App. 222, 227, 925 P.2d 1241, 1243 (1996).

Ultimately, the district court in American Medical concluded that the insured had the burden to prove that the underlying settlements were for covered claims.  31 F. Supp.3d at 1098.  The district court found that “[t]here appears to be no reason to assign the burden to defendants to prove which claims were covered and which were not,” as the insurer’s contractual obligation was to indemnify the insured “for covered claims,” and, as a party to the settlements, the insured was “in the best position to know the bases for the settlements in the underlying cases.”  Id.

For insurers, the initial burden of proof can be significant in coverage litigation, especially where coverage is sought for a settlement agreement to which the insurer was not a party.  As the American Medical court observed, the insured may be in the best position to know the basis for the settlement.  It will be interesting to see whether or not Oregon courts will follow this same approach.


Has SCOTUS Signaled Putative Class Action Defendants to More Aggressively Challenge the Merits of Plaintiff’s Case at the Class Certification Stage?

Posted in Declaratory Judgment Strategy

The holding in a recent opinion of the Supreme Court of the United States in a securities class action case raises broader questions regarding whether defendants should more aggressively challenge the merits of plaintiff’s case at the certification stage in other types of cases.  This includes product defects, energy, and health care, but also, of particular concern, insurance.


The case, Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398, 189 L.Ed.2d 339 (June 23, 2014), addresses the question presented of whether the defendant in a securities class action should be afforded the opportunity at the certification stage to rebut the presumption that the defendant’s misrepresentations affected the market price of the stock.  The presumption was established in Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), which held that investors could satisfy the requirement that they relied upon the defendant’s alleged misrepresentations by invoking a presumption that the price of a stock traded in an efficient market reflects all public, material information – including material misstatements.  Left undecided for over twenty-five years after Basic was the stage of the proceedings the putative class defendant could challenge the presumption.  The question was finally settled by Halliburton.


Halliburton is one of those rare cases appealed to the Supreme Court not once, but twice.  Plaintiff appealed after the trial court earlier denied class certification and the Supreme Court reversed, holding that loss causation is different from the issue of whether an investor relied on a misrepresentation in purchasing the stock.  On remand, Halliburton again challenged class certification, this time arguing that the evidence previously submitted rebutted the Basic presumption of reliance by showing no “price impact.”  Absent the presumption, investors would have to prove reliance on an individual basis, meaning that individual issues would predominate over common issues.  The trial court declined to consider Halliburton’s argument at the certification stage, applied the presumption, and certified the class.  This time, Halliburton appealed.


The Fifth Circuit affirmed, holding that price impact evidence could not be used to rebut the presumption of reliance at the class certification stage because “price impact evidence does not bear on the question of common question predominance [under Rule 23(b)(3)], and is thus appropriately considered only on the merits after the class has been certified.”  718 F.3d 423, 435 (2013).  The Supreme Court reversed, holding that whether an alleged misrepresentation had a price impact, “has everything to do with the issue of predominance at the class certification stage.”  134 S.Ct. at 2416.  Therefore, trial courts should consider both direct and indirect price impact evidence at the certification stage.   Id. at 2417.


The holding in Halliburton significantly impacts the defense of securities class actions at the certification stage, but its potential usefulness in defending other types of class actions should not be discounted.  As the concurrence from Justice Ginsburg noted, “[a]dvancing the price impact consideration from the merits stage to the certification stage may broaden the scope of discovery available at certification.”  Id.  This may have influence beyond the securities class action arena because, if defendants are allowed to challenge more aspects of plaintiff’s case at certification, they should similarly be able to obtain broader pre-certification discovery pertinent to those issues.


For example, when considering certification of a class against an insurance company, which is a type of case seemingly ever more common, courts often certify a class even though conceding that damages issues likely will eventually be decided on the merits on an individualized basis, perhaps acting on the reasonable assumption that certification of a class most likely will lead to settlement so that the individualized damage issues are never reached.  But should the trial court consider evidence at the certification stage that at least some of the putative class members did not rely on the insurer’s alleged misrepresentations to the putative class?  By analogy, the holding in Halliburton suggests the answer is likely “yes.”  There may be a common misrepresentation, whether in sales or claims handling, but the defendant should have the opportunity to show at the class certification stage that not all putative class members relied on the misrepresentation, i.e., there was no analogous “fraud on the market.”  This means class defendants need to identify these potential issues early in the case and be aggressive in seeking merits discovery regarding them prior to the trial court ruling on certification.


Nor should the reasoning of Halliburton limit its potential use in challenging commonality under Rule 23(a).  The Halliburton Court considered whether evidence was pertinent to common question predominance under Rule 23(b)(3), but one might also argue that its holding should be extended to question whether the same evidence is pertinent to whether there is even a common question under Rule 23(a).


So far, the holding in Halliburton has not been applied in cases beyond the securities class action arena.   That does not mean defense counsel should not continue to be creative in seeking ways to apply it more broadly to other types of class actions to oppose certification of a class.

When can an Insurer’s Representations during Policy Negotiations Prevent Enforcement of the Written Policy Terms? Recent Oregon case Deardorff v. Farnsworth offers insight.

Posted in Liability Coverage, Recent Cases

In Oregon, under certain circumstances when an insurer denies a defense, an insured may rely upon the doctrines of estoppel and oral binder to avoid the written terms of the policy.  Estoppel precludes an insurer, based on its acts, conduct, or silence when there is a duty to speak, from asserting a right that otherwise would have been available.  To establish estoppel: (1) there must be a false representation; (2) it must be made with knowledge of the facts; (3) the other party must have been ignorant of the truth; (4) it must have been made with the intention that it should be acted upon by the other party; and (5) the other party must have been induced to act upon it.  Bennett v. City of Salem et al., 192 Or 531, 235 P2d 772 (1951).  Estoppel cannot create coverage or negate an express exclusion in an insurance policy, but it can avoid a condition of forfeiture (e.g., a duty to cooperate).  ABCD…Vision v. Fireman’s Fund Ins. Companies, 304 Or 301, 744 P2d 998 (1987) (“ABCD”).

An oral binder may impose a duty to defend when the written terms of the policy do not.  An oral binder requires that the parties agree on the thing insured, the risk insured against, the amount of insurance, and the duration of the risk.  See United Pac. Ins. v. Truck Ins. Exch., 273 Or. 283, 541 P.2d 448 (1975).  An oral binder may supersede the terms of a subsequent written policy.  Oregon Rev. Stat. 742.043(1).

Recently, the Oregon Court of Appeals addressed the scope of estoppel’s application in a coverage action relating to an insurer’s refusal to defend.  Deardorff v. Farnsworth, 2015 WL 465329 (Or. Ct. App. 2015).  In Deardorff, the insured’s insurance agent was renewing a Farm and Business policy with Oregon Mutual Insurance (OMI).  The agent inquired about the possibility of adding liability coverage for others’ property in the insured’s care, custody, and control (“CCC”).  OMI responded that “liability exposure for property of others in the insured’s CCC, that is covered in liab form.”  That communication led to the agent procuring CCC coverage for the insured.  Coverage was bound and OMI sent a copy of the policy to the agent before the loss occurred.  The policy provided excess CCC property coverage but expressly excluded CCC liability coverage.

The insureds were sued for damage to others’ property that occurred while the property was in the insured’s custody.  The insureds tendered defense of the suit to OMI, which refused to defend because the policy did not provide CCC liability coverage.  The insureds successfully defended the claim, and they brought suit against their insurance agent and OMI to recover their defense fees and costs.

The Court of Appeals examined whether OMI’s representation that CCC liability was “covered” under the liability form could form the basis for estopping OMI from relying upon the express exclusion of CCC liability coverage.  Generally, estoppel cannot expand coverage or negate an express exclusion, but it can negate a condition of forfeiture.  See ABCD, supra.  An exception to the general rule, however, is that an insurer’s interpretation of an ambiguous policy provision may estop the insurer from relying on that provision.  Farley v. United Pacific Ins. Co., 269 Or 549, 525 P2d 1003 (1974).

The Court of Appeals held that OMI was not estopped from relying upon the express exclusion of CCC liability coverage.  CCC liability coverage was never included in policy’s coverage, and therefore the exclusion was not a “forfeiture.”   Estoppel would not negate the express CCC liability exclusion unless the exception recognized in Farley applied.  The insurer’s assertion that CCC liability coverage would be “covered” in the liability form, though, was not an interpretation of ambiguous language, and the Farley exception did not apply.

Deardorff may be interpreted to continue the Oregon courts’ line of cases limiting the estoppel doctrine with respect to its application to an insurer’s representations prior to the issuance of an insurance policy.  Deardorff did not address the possibility of an oral binder, but it may continue to be a concern in Oregon when a party seeks to modify the written terms of the policy, as reaffirmed recently by the Oregon Supreme Court in Stuart v. Pittman.  350 Or. 410, 255 P.3d 482 (2011).

Recent Oregon Case Describes Burdens of Proof Applicable to Claims for Liability Coverage for Claims Involving Continuous or Progressive Property Damage

Posted in Uncategorized

The Oregon Court of Appeals recently issued a decision impacting burdens of proof and allocation of damages in cases involving liability insurance claims for coverage of progressive or continuous property damage.  The case, FountainCourt Homeowners Ass’n v. FountainCourt Development, LLC, 264 Or. App. 468, 334 P.3d 973 (2014), arose from a construction defect lawsuit that a homeowners association brought against several builders, including a subcontractor (“the sider”) that had installed siding on a multi-unit project.

The homeowners association’s only claim against the sider was that the sider’s negligence caused physical property damage.  The jury found that the sider was 22% at fault, and the trial court entered a judgment for an amount that represented that percentage of the total damages.  American Family Insurance had issued a commercial-general liability insurance policy to the sider covering a period of time subsequent to the construction.  In a subsequent garnishment action to obtain insurance benefits American Family allegedly owed the sider, the association sought to recover from American Family the entire amount of damages awarded against the sider.

In the garnishment action, the trial court held that the association, standing in the shoes of the insured sider, had met its burden of proving coverage within the coverage grant of the policy, and that American Family failed to meet its burden of proving that some portion of the judgment against the sider was excluded.  On appeal, American Family argued that the jury in the underlying case had impermissibly awarded damages in the form of the costs to repair the sider’s own faulty work, which work was not “property damage” under the policy.  The Court of Appeals rejected American Family’s argument that, although insurers have the burden of proving the applicability of exclusions, it did not have the burden of proof regarding the “your work” exclusion, because the exclusion embodied a distinction inherent in the definition of “property damage.”

American Family argued that the evidence showed that some of the water damage occurred outside the American Family policy period, and that the association had the burden of establishing that all of the sider’s damages were for property damage that occurred during the policy period.  The Court of Appeals disagreed, explaining that given the progressive and continuing nature of the water damage, the award of damages could represent property damage that occurred entirely during the policy period, and nothing in the record required a conclusion otherwise.  The court explained:

In the case of continuing and progressive water damage, the award of damages is not tied to discrete instances of property damage along a time continuum; instead the liability for property damage may be the same in every triggered policy period. That is so because the scope of repair—to replace the damaged structural components and eliminate the water intrusion—does not necessarily change depending on the year in which the damage occurred.

In light of its decision, the Court of Appeals did not rule on the homeowners association’s argument that Oregon has essentially adopted an “all sums” allocation approach in which any one insurer whose policy is triggered has a duty to makes its insured whole, absent an applicable exclusion, up to available policy limits.  Nevertheless, the Court of Appeals decision describes an approach that appears somewhat akin to an “all sums” allocation.  In a continuous or progressive injury claim, an insured need only establish that the judgment reflects damages for property damage that occurred during the policy period; and that all of the awarded damages could have been for property damage sustained during that policy period.  At that time, the burden shifts to the insurer to prove that some portion of the damages did not reflect property damage occurring during the policy period.

NY Court of Appeals Interprets Noncumulation Clause In Favor of Insurer

Posted in Liability Coverage

In Nesmith v. Allstate Ins. Co., New York’s high court revisited the issue of the noncumulation clause in an insurance policy wherein a plaintiff was seeking to recover alleged damages as a result of exposure to lead-based paint. The Court last ruled on the effect of a noncumulation clause in 2005 in Hiraldo v. Allstate Ins. Co. The issue before the Court in Hiraldo was whether a single plaintiff, alleging exposure to lead paint over multiple policy periods wherein the policy was renewed in successive years, could recover more than one policy limit. The Court in Hiraldo held that due to the noncumulation clause, the plaintiff could only recover one policy limit regardless of the number of policy periods implicated by the alleged exposure.

In Nesmith, the Court was called upon to determine the effect of the noncumulation clause on the amount of coverage available wherein multiple plaintiffs from different families alleged exposure to lead paint in the same apartment in different policy periods. Allstate Insurance Company issued an insurance policy to the landlord of a two-family home in September 1991. The landlord renewed the policy in 1992 and 1993. The policy had a $500,000 limit per occurrence and contained the following noncumulation clause:

Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under the Family Liability Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss.

Felicia Young lived in one of the two apartments from November 1992 to September 1993. In July 1993, the landlord was informed by Monroe County that Young’s children had elevated lead levels and that various areas of the apartment were in violation of regulations regarding the presence of lead paint. The landlord did remediation work and Monroe County informed the landlord in August 1993 that the areas in violation had been corrected.

After Young and her children vacated the apartment, Lorenzo Patterson and Qyashitee Davis moved into the same apartment with two children in September 1993. Their children were diagnosed with elevated lead levels and the landlord was again cited in December 1994 for areas of the apartment that were in violation of regulations governing the presence of lead paint.

In 2004, guardians for Young’s children and the Patterson children filed two separate lawsuits alleging injurious exposure to lead paint in the apartment. The action brought on behalf of Young’s children settled in 2006 for $350,000. Allstate then took the position that due to the noncumulation clause, only $150,000 of coverage remained for the claims brought on behalf of the Davis children on the ground that exposure to lead paint during the separate policy periods was exposure to the same general condition, and therefore only one policy limit of $500,000 was available for both actions. The Davis plaintiffs settled their claims for $150,000 subject to a stipulation that would allow the plaintiffs to proceed with a declaratory judgment action against Allstate on the issue of whether a complete and separate $500,000 policy limit was available for the Davis claims.

The Davis plaintiffs pursued the declaratory judgment action against Allstate and Supreme Court granted the declaration sought by the plaintiffs, holding that the children in the two actions were not injured by exposure to the same conditions. The Appellate Division, Fourth Department, disagreed and reversed Supreme Court, holding that under Hiraldo and the plain language of the noncumulation clause, the injuries in both actions were the result of “continuous or repeated exposure to the same general conditions.” The Court of Appeals granted plaintiffs leave to appeal.

The Court of Appeals noted that plaintiffs could not argue that renewal of the policy over successive policy years increased the limits of available coverage due to the Court of Appeals’ decision in Hiraldo. Rather, plaintiffs only argument was that the Young children and Davis children were not injured as a result of “continuous or repeated exposure to the same general conditions.” The Court of Appeals rejected plaintiffs’ argument, noting that the Young children and the Davis children were exposed to the same hazard—lead paint—in the same apartment. The Court noted that the Young and Davis children may not have been exposed to the exact same conditions, but to find that they were not exposed to the same general conditions would deprive the word “general” in the noncumulation clause of all meaning. The Court went on to note that the plaintiffs did not claim a new lead paint hazard had been introduced to the apartment between the tenancies of the Young children and the Davis children, and also noted there was no evidence from the record to provide a basis for an inference that a new lead paint hazard had been introduced to the apartment. Rather, the only logical conclusion, according to the Court, was that the landlord’s initial remediation efforts were not completely successful and the Young children and Davis children were exposed to the same general conditions for which only a single $500,000 policy limit was available.

Justice Piggott wrote a dissent joined by Justice Lippman. The dissent disagreed with the majority on two grounds. First, the dissent would have found the children in the two actions were not exposed to the same general conditions because the landlord took remedial steps to address the lead paint conditions and was told by Monroe County in August 1993 that those conditions had been corrected. Second, the dissent wrote that the majority’s position was inconsistent with reasonable expectation of the insured in that the insured would not have continued to renew the policies at virtually the same premium rates if he had known that he had procured less protection with respect to lead paint claims in the later years if a claim were paid resulting from an exposure occurring in the earlier policy periods.

Submitted by Jeff Casey, Ward Greenberg Heller & Reidy LLP