National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

In Certain Underwriters at Lloyd’s London v. Mass. Bonding & Ins. Co., the insureds in an underlying coverage action had obtained a judgment against the plaintiff insurers, London, for the insureds’ attorney fees pursuant to ORS 742.061.  London then filed this action for inter-insurer contribution against the defendant insurers who had also provided policies to, but subsequently settled with, the insureds. In granting the defendant insurers’ motion for partial summary judgment, the trial court ruled that London was not entitled to inter-insurer contribution from the defendant insurers for the attorney fees awarded to the insureds, and London appealed that ruling. In August 2011, in Certain Underwriters at Lloyd’s London v. Mass. Bonding & Ins. Co., 245 Or App 101 (2011), the Oregon Court of Appeals affirmed the trial court’s ruling by finding that London’s liability for a statutory award of attorney fees did not arise out of a contractual obligation it shared with the other insurers.  Rather, the statutory obligation arises only after the insured prevails at trial and obtains a recovery that exceeds the insurer’s highest tender. The Court of Appeals noted that in the underlying coverage action the insureds settled with the defendant insurers and thus never satisfied the statutory prerequisite that it obtain a recovery that exceeded the defendant insurers’ highest tenders. As the insureds accepted the defendant insurers’ highest tenders, the insureds never met the terms of the statute regarding the defendant insurers, and thus the defendant insurers did not share the liability for the insureds’ attorney fees with London.

In October 2011, in the underlying coverage action noted in the opinion addressed above, the Oregon Supreme Court considered whether a 2005 amendment to ORS 742.001 that excepts “surplus lines insurance policies” from ORS Chapter 742, applies to modify the scope of ORS 742.061.  ZRZ Realty Co. v. Beneficial Fire and Casualty Insurance Company, 351 Or 255 (2011). While the ZRZ Realty court did not expressly state that the amendment excepting surplus lines policies modifies ORS 742.061, the Court did find that “to the extent the 2005 amendment applies to ORS 742.061, that amendment does not apply to actions filed before its effective date.” As the ZRZ Realty case was filed prior to the effective date of the amendment, and as the Court held that the 2005 amendment does not apply retroactively, the Court found that the amendment had no application to this action.

The ZRZ Realty court then considered whether the plaintiff insureds were entitled to attorney fees they sought under ORS 742.061. The Court held that because the insureds had timely submitted a proof of loss regarding the insurer’s duty to defend, and because the insureds recovered more defense costs than the insurer had tendered, then the insureds were entitled to recover their costs for establishing the duty to defend. But, as the insureds had not yet recovered any indemnification costs from the insurer, the ZRZ Realty court held that the insureds were not entitled to recover attorney fees related to the duty to indemnify. The ZRZ Realty court noted, though, that this decision does not preclude the insureds from recovering attorney fees in the future for the work that their attorneys have done, both at trial and on appeal, to establish the insurer’s duty to indemnify if the insureds meet the terms of the statute. It is reasonable to anticipate, then, that these cases may continue to provide Oregon’s appellate courts with additional opportunities to address issues regarding ORS 742.061.

This decision concerns a declaratory action brought by State Farm against American Family. Each insurer insured a general contractor that built a home.  The homeowners filed an underlying action against the general contractor alleging that they had incurred damages to the home as the result of the general contractor’s breach of contract, breach of implied warranties, including a warranty of habitability, and negligence.  State Farm defended the insured general contractor; American Family declined to defend.  State Farm sought a declaration that American Family was obligated to defend the insured and obligated to contribute to the costs of defense incurred by State Farm.  The parties filed cross-motions for summary judgment and the trial court ruled that American Family had a duty to defend the insured.  In reversing the trial court ruling, the Court of Appeals found the underlying complaint alleged damages for defective work but not “property damage” as defined in the American Family policy.

The Court of Appeals engaged in a comparison of the underlying complaint’s allegations and the policy at issue to determine the duty to defend in accordance with Oregon law.  State Farm took the position that the allegations would have allowed the submission of evidence that the insured’s negligent work permitted water to intrude into the home and cause wall studs or window frames to rot.  American Family countered that, because the complaint did not allege any consequential injury resulting from the allegations of defective workmanship, the homeowners could not have recovered damages for injury to other structures without amending their pleadings.

The Court of Appeals viewed the issue of whether American Family had a duty to defend its insured under the terms of its policy as a pleading issue.  To determine the issue, the Court of Appeals applied a collateral damages analysis.  Compensatory damages for injury to real property are generally divided into categories of general and special or collateral damages.  Under Oregon law, general damages are damages that naturally and necessarily result from the particular type of injury alleged, whereas special or collateral damages are those damages that may flow naturally from the injury but not necessarily.  General damages are not required to be pleaded with specificity because the opposing party is on notice as a matter of law that general damages arise from the nature of the injury alleged.  The failure to plead the exact nature of collateral damages or their derivation, however, will result in their exclusion from evidence and preclude their recovery.

The Court of Appeals found that although water damage to other components could have been a result of the insured’s alleged negligent work identified in the underlying complaint, such damage was not a necessary result.  Because that water damage was not a necessary result of the insured’s alleged negligence but was collateral in nature, the underlying plaintiffs were required to specially plead allegations of such water damage before evidence of it could be properly admitted.  Thus, the Court of Appeals found American Family had no duty to defend the insured against the underlying negligence claim because the underlying complaint was unambiguous and did not plead with specificity injury to property covered by American Family’s policy.

Shilo had contracted with Maryland Casualty’s insured, Grant, to install various granite components in its hotel, including granite panel tub surrounds. Shilo determined the granite tub surrounds were poorly installed, and filed a complaint in arbitration against Grant alleging claims for breach of contract and negligence for faulty work. In a Memorandum of Decision, the arbitrator found that much of Grant’s work was defective and faulty, and that, as a result, water intrusion had occurred behind the granite tub surrounds in many rooms. The arbitrator also found that there was little evidence of the extent of water intrusion damage behind the granite. The arbitrator awarded Shilo damages against Grant for the cost to remove improperly installed granite panels and to install new granite tub surrounds, and Shilo’s mitigation cost to hire another contractor to make the panels watertight. Notably, the arbitrator awarded no damages for wall board, or framing or any components behind the panels.

Shilo then filed a Writ of Garnishment against Grant, noticing Maryland Casualty as garnishee, to recover the judgment entered against Grant in state court. Maryland Casualty removed the garnishment action to federal court. Shilo’s claim for coverage for property damage under the policy was based upon its contention that, during the policy period, Grant negligently installed granite that allowed water to intrude into the tub surrounds. In denying Shilo’s summary judgment motion and granting Maryland Casualty’s cross-motion for summary judgment, the District Court focused on the policy’s exclusion for property damage to “[t]hat particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it” (emphasis in opinion), and ruled that the arbitration award of damages to remove and replace defectively installed granite tub surrounds was excluded from coverage.

On Shilo’s appeal, the Ninth Circuit’s focus was on whether there was evidence in the record supporting Shilo’s contention that “property damage” had taken place during the policy period.  Noting evidence that the rooms had not been used until after the policy period, and noting that Shilo had presented no evidence that “property damage” had taken place during the policy period, the Ninth Circuit affirmed the District Court’s grant of summary judgment for Maryland Casualty. In doing so, the Ninth Circuit made clear that, under Oregon law, coverage is triggered by the occurrence of property damage, defined in the Maryland Casualty policy as physical injury to tangible property, even if the damage is not discovered until later.  St. Paul Fire & Marine Ins. Co. v. McCormick & Baxter Creosoting Co., 324 Or 184, 923 P.2d 1200, 1211 (1996).  Addressing Shilo’s contention that “property damage” takes place at the moment a defective product is installed, the Ninth Circuit emphasized that McCormick does not hold that “mere installation of a defective product, without resulting physical injury to property during the policy period, triggers coverage.” Also, the Ninth Circuit notably did not address Shilo’s contention that the policy provided coverage for the cost to remove and replace the insured’s defective work in order to see if there was any actual physical injury to materials behind the insured’s work.

This case involves insureds who were in the business of dismantling decommissioned ships at a site on the Willamette River in Portland, Oregon.  The dismantling process resulted in the release of some pollutants directly into the river and some pollutants onto the land, which further led to pollutants leaching into the groundwater and the river.  From 1956 to 1983, the insureds purchased three types of insurance policies that are at issue in this case: comprehensive general liability policies, marine excess coverage policies, and marine protection and indemnity policies. In 1994, the Oregon Department of Environmental Quality (DEQ) notified the insureds that they were potentially responsible for cleaning up environmental contamination at the site.  In response to DEQ’s notice, the insureds sought defense and indemnity from the insurer from whom they had bought insurance policies. The insurer declined coverage, and the insureds brought this action for breach of contract and declaratory relief.

The first issue the Court addressed on review was whether a policy’s requirement that any damage, in this case to the environment, be neither intended nor expected is part of a limited grant of coverage to which the insureds would have to prove entitlement or an exclusion from a broad grant of coverage for which the insurer would have to prove justification. Affirming the Court of Appeals’ allocation of the burden of proof, the Court noted that Oregon authorities allocate the burden of production and persuasion based upon whether a policy grants limited coverage or broad coverage subject to an exclusion, and concluded that respecting the way the parties chose to structure the policy is the appropriate method to classify the limitation. The Court found that method both permits parties to structure their agreements in a way that allocates the burden of proof and avoids putting courts in the difficult position of “divining the ‘essence’ of contractual provisions that logically may serve either as a grant of limited coverage or an exclusion from a broad grant of coverage.” In this case, the insured bore the burden of persuasion when the limitation on expected or intended damage was part of the coverage grant through the definition of “occurrence.” The insurer bore the burden for those policies where the coverage grant did not include this limiting language.

On the second issue regarding whether “damage to any harbor, dock (graving or otherwise), slipway, way, gridiron, pontoon, pier, quay, jetty, stage, buoy, telegraph cable or other fixed or moveable thing whatsoever” includes damage to river sediments, the Court reversed the holding of the Court of Appeals. Applying Oregon’s established rules for interpreting insurance policies, the Court determined that because the parties’ differing interpretations of the insurance provision were each plausible, and because examination of the remainder of the policy did not remove ambiguity in the meaning of the provision, the Court interpreted the phrase “any * * * other fixed or moveable thing whatsoever” broadly in favor of the insureds to include damage to the sediment in the river within the scope of coverage.

The undisputed facts revealed that the insured had removed a portion of his home’s roof in order to make repairs, exposing a plywood sublayer.  To protect the home during the repairs, the insured installed plastic sheeting over the plywood sublayer.  However, a storm blew some of the sheeting loose, and when the insured attempted repairs he ended up falling off the roof and bringing down more of the sheeting with him.  As a result, rain water penetrated the plywood sublayer and damaged the home’s interior and contents.

Because the policy did not define “roof,” the question posed to the Courts was whether the plastic sheeting qualified as a “roof” such that the exception to the water damage exclusion applied.  The Court of Appeals held that a “roof” involved some degree of permanence, writing:  “If someone attempted to sell a house that was covered by such a plastic sheet, we doubt that any reasonable buyer would believe that he or she was buying a house that had a ‘roof.’  Most likely, the buyer would say, ‘Where’s the roof?’”

The Supreme Court reversed, noting that the common dictionary definitions for “roof” did not include a permanence requirement.  Rather, the Court applied a functional test, holding that a “roof” only needs to “be sufficiently durable to meet its intended purpose: to cover and protect a building against weather-related risks that reasonably may be anticipated.”  Because the insured had presented expert testimony that the plastic sheeting “would have been adequate to protect the home for one or two years if necessary,” the Court found a fact question as to whether or not the plastic sheeting qualified as a “roof.” 

It is important to note what Dewsnup does not hold.  At least one insured’s attorney is already citing Dewsnup for the proposition that the presence of an undefined policy term, e.g., “roof,” creates a factual issue which precludes summary judgment.  This is not true.  The Dewsnup Court did not depart from the long-standing rule that insurance policies are construed as a matter of law in Oregon.  The factual question which precluded summary judgment was not the meaning of the term “roof” (indeed, the Court applied its own definition as a matter of law), but, rather, whether the plastic sheeting at issue in the case met that definition.  Genuine disputes over the material facts which comprise an insured’s claim (e.g., when certain property damage occurred) have always been sufficient to defeat summary judgment.  In contrast, disputes over the meaning of undefined policy terms are resolved as a matter of law and, therefore, do not preclude summary judgment.  Dewsnup does not change that dynamic.

However, in Wilson v. TriMet, A138860 (Or. Ct. App. April 14, 2010), Oregon’s Court of Appeals ruled that ORCP 54 E does not apply to cases where an insured seeks recovery of attorney fees pursuant to ORS 742.061. That statute creates an entitlement to attorney fees whenever an insurer fails to settle within six months of receiving proof of loss and the insured’s ultimate recovery exceeds the insurer’s best offer. The Court ruled that this six month deadline was absolute, even in the face of ORCP 54 E.

The Court explained: “If an insurer is allowed to nullify a portion of the attorney fee award required by ORS 742.061 by making an offer of judgment pursuant to ORCP 54 E after six months from proof of loss … the core purposes of ORS 742.061 to reduce litigation and encourage efficient claims settlement would be defeated.” This reasoning is counterintuitive to the extent it would allow an insured to reject a generous offer seven months after providing proof of loss but then still recover all of its attorney fees after failing to beat that offer following many more months of litigation and trial. In that situation, the effect of the Wilson decision may actually be to encourage reckless prosecution of insured’s claims based on the knowledge that attorney fees are all but guaranteed if the insurer fails to make a reasonable offer within six months. The slight disincentive that ORCP 54 E offered is now gone.

The lesson to insurers in Oregon is clear: put your best offer on the table within six months of being provided with a proof of loss. Otherwise, you better be prepared to pay attorney fees regardless of any additional settlement efforts after the six month deadline.

The Court of Appeals reversed, holding that the evidence was “simply to vague and obscure to satisfy the requirement of ORS 742.043(1)” that, in the context of oral binders, any exception to standard coverage must be “clear and express.”  Because the insured’s own expert testified that standard “course of construction” policies would not have covered the loss, the burden was on the insured to prove that the standard terms had clearly and expressly been broadened for purposes of the oral binder.  Viewing the evidence (which consisted almost exclusively of the insured’s own testimony about what had been represented to him) in the light most favorable to the insured, the Court of Appeals nevertheless found “that there is no evidence that the parties agreed to or that [the agent] bound terms that clearly and expressly waived or superseded the usual terms or exclusions of course of construction coverage.”

In this case, the insurer appealed a supplemental judgment awarding attorney fees to the plaintiff, its insured, after the plaintiff prevailed in an action for payment of uninsured motorist (UM) benefits. The plaintiff had sustained personal injuries in an automobile accident caused by a hit-and-run driver and sought UM benefits under her policy with the insurer. The insurer paid her $800 in exchange for her signing a “Trust Agreement and Release in Full,” which released and discharged the insurer from all rights, claims, demands and damages of any kind resulting from bodily injury arising from the accident. The plaintiff, however, did not speak or read English, and was not represented by counsel at the time.

More than a year later, the plaintiff retained counsel who sent the insurer a letter rescinding any previously executed release forms and requesting additional UM benefits under the plaintiff's policy. The insurer responded by letter that that there were no issues as to the existence of UM coverage, the only issues being the liability of the uninsured driver, the insured’s damages, or both, and that the insurer agreed to binding arbitration. The plaintiff also ultimately agreed to arbitration.

At arbitration, the issue was the enforceability of the release and, if it was determined not to be enforceable, the amount of additional damages owed to plaintiff. The arbitrator ruled that the release was unenforceable, and awarded the plaintiff damages in excess of $800, but declined to award attorney fees ruling that the defendant had qualified under ORS 742.061(3). That statute entitles an insured to attorney fees if he or she brings an action on a policy and recovers more than the insurer offers in settlement, but provides the insurer a “safe harbor” by insulating it against having to pay attorney fees in personal injury protection and UM cases if the insurer meets the statutory requirements. The arbitrator ruled that the insurer met all of the requirements for avoiding fees including the provision that the only disputed issues at arbitration were liability and damages.

The plaintiff filed an exception to the arbitrator's denial of attorney fees and requested a hearing de novo in circuit court. She contended that, in addition to damages and liability, the parties also disagreed on the enforceability of the release. The trial court agreed with the plaintiff and, in a supplemental judgment, awarded her $16,036.83 in attorney fees and costs.

The Court of Appeals examined the language and legislative history of the statute at issue and concluded that only after the arbitrator had resolved the preliminary issue of the release’s enforceability could the arbitrator address the issue of the damages that plaintiff should receive under the policy. Damages and liability, then, were not the only issues submitted to binding arbitration, and the insurer was therefore not eligible for the attorney fee “safe harbor” in ORS 742.061(3).