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.

In reaching its decision, the 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. ORS 742.061 provides that a plaintiff who brings an action on any policy of insurance may recover its attorney fees if the insurer does not settle within six months of the plaintiff’s filing of a proof of loss, and if the plaintiff recovers more than the insurer tendered.  Significantly, the Court did not expressly state that the 2005 amendment applies to ORS 742.061.  Instead, the Court held that “to the extent the 2005 amendment applies to ORS 742.061, that amendment does not apply to actions filed before its effective date.” The Court also noted that it expressed no opinion on how the 2005 amendment applies to other provisions of ORS chapter 742. As the plaintiffs’ action in the case at issue was filed prior to the effective date of the amendment, and as the Court held that the 2005 amendment does not apply retroactively, the amendment had no application to the plaintiffs’ action.

The Court then considered whether plaintiffs were entitled to attorney fees they sought under ORS 742.061.  The Court held that because the plaintiffs had timely submitted a proof of loss regarding the insurer’s duty to defend, and because the plaintiffs recovered more defense costs than the insurer had tendered, the plaintiffs were entitled to recover their costs for establishing the duty to defend. As the plaintiffs have not recovered any indemnification costs from the insurer, however, the Court held that the plaintiffs are not entitled to recover attorney fees related to the duty to indemnify.

The Court noted, though, that this decision does not preclude plaintiffs from recovering attorney fees in the future for the work that its attorneys have done, both at trial and on appeal, to establish the insurer’s duty to indemnify if the insurer did not settle with plaintiffs within six months of their filing a proof of loss and if plaintiffs recover on remand more indemnification costs than the insurer had tendered.

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.

In 2003, the insureds learned that the police had discovered a methamphetamine lab in their rental property. In April and May of 2003, the insureds telephoned their insurer’s agent seeking help with the cost of the decontamination. The insureds filed an action against their insurer for breach of the insurance contract after the agent informed them that the policy excluded coverage for the contamination damage. In December 2003, the insurer offered to settle all of the insureds’ claims after learning that the property had also sustained damage from vandalism. The insureds accepted the offer and a judgment was entered. The insureds then filed a petition for attorney fees under ORS 742.061, claiming that the April and May 2003 telephone calls constituted “proof of loss” within the meaning of the statute and that they took place more than six months before the insurer’s settlement offer. The insurer contended that the telephone calls did not qualify as “proof of loss” of the claims that were subsequently settled because “proof of loss” must be in writing, and because the information conveyed in the telephone calls pertained only to methamphetamine damage excluded from coverage under the policy.

Addressing the insurer’s first contention, the Court concluded that to hold that “proof of loss” for the purposes of ORS 742.061 must involve a writing was incompatible with the Court’s functional definition of “proof of loss” articulated in its prior opinions as “[a]ny event or submission that would permit an insurer to estimate its obligations (taking into account the insurer’s obligation to investigate and clarify uncertain claims) qualifies as ‘proof of loss’ for purposes of [ORS 742.061].” Addressing the insurer’s second contention, the Court noted that, that the insureds’ complaint against their insurer for breach of the insurance contract included a broad allegation for “accidental physical damage.” The Court found that, while not immediately obvious, that that term could refer to methamphetamine contamination just as easily as it could to vandalism damage. The Court found that as the insurer refused to pay a claim for methamphetamine contamination, but then, more than six months later, agreed to settle “all claims alleged in this matter,” the insurer had, in fact, settled a methamphetamine damage claim for which the insureds’ telephone calls had conveyed sufficient information to constitute proof of loss for the purpose of ORS 742.061, and the insureds were entitled to their attorney fees under the statute.