When does an insurer have a duty – or not – to defend an insured, and what facts can be used to make this determination? These are two of the most common, yet challenging questions faced by insurers. To help clarify the issue, the topic of today’s post is the use of extrinsic evidence for purposes of determining the duty to defend in Oregon. As part of our discussion, we address the use of extrinsic evidence endorsements and their potential utility.
In Oregon, the general rule is that the duty to defend is determined by comparing the allegations in the complaint to the policy provisions without reference to evidence extrinsic to those documents. Ledford v. Gutoski, 139 Or. 397, 400 (1994). Oregon’s limitation on the use of extrinsic evidence applies “regardless of whether information extrinsic to the complaint could establish that the claim at issue is not covered.” Keizer Campus Ops., LLC v. Lexington Ins. Co., 2013 WL 4786521 at *2 (D. Or. Sept. 5, 2013) (citing Ledford, 319 Or. at 400).
Oregon appellate cases have recognized exceptions to the general rule against the use of extrinsic evidence in determining the duty to defend, including the following:
- Instances where courts are attempting to determine whether an organization or individual qualifies as an insured. See Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 237 Or. App. 468 (2010);|
- Instances where a prior judicial determination precludes coverage, such as the criminal conviction for intentional injury which estops the insured from claiming the injury was unintentional. See Casey v. Northwestern Sec. Ins. Co., 260 Or. 485 (1971);
- Instances where the court is asked to consider extrinsic evidence of the date an insured provided notice of a claim when analyzing an insurer’s duty to defend under a claims-made policy. See Keizer, 2013 WL 4786521 at * 2.
For a recent discussion of these exceptions, see Navigators Ins. Co. v. K&O Contracting LLC, 2013 WL 6383878 (D. Or. Dec. 4, 2013).
Because the recognized exceptions to the extrinsic evidence rule only apply in a few narrow circumstances, it is common for an insurer to have a duty to defend even when undisputed facts exclude indemnity. This presents a problem for insurers hoping to restrict their defense obligation to only those suits alleging injury or damage covered by the policy.
One of the ways insurers have tried to control the scope of their defense obligation has been to draft policy endorsements that allow for consideration of extrinsic evidence. Typical wording may read:
We may look to extrinsic evidence outside of the allegations and/or facts pleaded by any claimant to determine whether we owe a duty to defend or indemnify against a lawsuit seeking “bodily injury” or “property damage,” provided that extrinsic evidence does not contradict a claimant’s pleaded allegation and provided that evidence relates to a discrete coverage issue under the policy and not a merits or liability issue.
Oregon courts have yet to interpret extrinsic evidence endorsements like the one above, and it is unclear whether such endorsements would allow a court to consider extrinsic evidence in a coverage action or summary judgment proceeding to defeat the duty to defend. Insurers may, however, have a reasonable argument that such provisions provide a good faith basis to deny an insured’s tender when extrinsic evidence clearly shows that the claims fall outside the policy’s coverage.
Oregon law provides that the rights and obligations under an insurance policy are first and foremost determined from the terms and conditions therein. Hoffman Const. Co. of Alaska v. Fred S. James & Co., 313 Or. 464, 469 (1992). Unambiguous language in an insurance contract is controlling. See Allstate Ins. Co. v. State Farm Mutual Auto. Ins. Co., 67 Or. App. 623, 627 (1984) (where contract language is unambiguous, courts will “apply those terms and will not create coverage where none was intended by the contract.”). Accordingly, Oregon law arguably allows parties to contract for the consideration of extrinsic evidence in some circumstances, notwithstanding the general rule to the contrary.
Insurers hoping to use extrinsic evidence as the basis for denying an uncovered claim should pay close attention to the type of evidence used, the language of the particular endorsement, and the scope of the policy’s Insuring Agreement. Notably, past cases analyzing the use of extrinsic evidence often involved policies that provided for the defense of any suit alleging a covered claim, even if those allegations might be false. See Ferguson v. Birmingham Fire Ins. Co., 254 Or. 496, 505-06 n8 (1969). In the context of such policy language, the appellate decisions have held that insurers “must assume the truth of the allegations [in] the complaint.” Headmann v. Liberty Mut. Fire Ins. Co., 158 Or. App. 510, 513 (1999). Newer policies, however, expressly modify the scope of the insurer’s defense obligation and allow reference to extrinsic evidence. If provisions such as the extrinsic evidence endorsement above are given effect as written, prior case law may have no application to modern policies, as those cases interpret the insurer’s obligations under different policy provisions which do not expressly allow for the use of extrinsic evidence.
Extrinsic evidence endorsements potentially change the analysis in Oregon duty to defend cases. New policies with language explicitly allowing reference to extrinsic evidence arguably involve an altered duty to defend standard compared to that owed under older policies. Prior case law regarding the use of extrinsic evidence may not be applicable to such policies. Regardless, these provisions reaffirm the importance of an insurer’s factual investigation.