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

The plaintiffs’ claims are that the system Farmers uses to deny claims for medical expenses constitutes breach of contract, fraud, breach of the implied duty of good faith, and tortious breach of the duty of good faith. The Oregon Supreme Court notes that in the argument before both of the lower courts and the Oregon Supreme Court, there was no discussion as to the elements of the theories of recovery. The claims are based on Farmers’ use of a computer system to analyze claims that resulted in automatic deductions, rather than a case-by-case review of the particular claims. The court reviewed the PIP statutes and found that ORS 742.524(1)(a) provides a presumption in favor of the necessity of medical expenses incurred by a health care provider. Once a claim is denied, the presumption is removed as well. The court noted, however, that the plaintiffs are not challenging the validity of the denials, but the investigation of the claims prior to the denial. The court held that at the time an insurer decides whether to accept or deny a PIP claim, the medical expenses incurred to that date are presumed to be reasonable and necessary. The court also held that since the summary judgment record did not demonstrate that the process Farmers uses is valid as a matter of law, Farmers was not entitled to summary judgment.

The court discussed an insurer’s duties of good faith to its insured before reaching its decision. In reaching its conclusion, the Oregon Supreme Court found that “because Farmers’ review methodology was an impermissible one, Farmers needed to establish that the procedures it employed to deny plaintiffs’ claims satisfied its statutory and common law duties and did not violate the prohibitions set out in ORS 746.230(1)(d).” ORS 746.230(1)(d) prohibits an insurer from denying a claim without a reasonable investigation. Since Farmers did not present evidence that its claim review process was valid, the plaintiffs did not have to produce evidence that their medical expenses were medically necessary.

In making its decision, the court reviewed the “guideposts” recited by the US Supreme Court in BMW of North America, Inc. v. Gore, 517 US 559, 568 (1996) and State Farm Mut. Ins. Co. v. Campbell, 538 US 408 (2003), in analyzing punitive damages awards for excessiveness. Of particular note is the court’s determination that the 4:1 ratio was appropriate in this case as opposed to the recent $79.5 million punitive damages award it upheld several weeks ago which is summarized in our prior post concerning the Williams v. Phillip Morris case. The court specifically stated that an award that exceeds the single-digit ratio may be acceptable in a “few narrow circumstances” including when “extraordinarily reprehensible” conduct is involved such as the conduct in Williams. The court referenced the fact that only economic harm was present in this case and Farmers’ conduct was not comparable to the conduct of Phillip Morris’ “50-year campaign to delude a large part of the population of Oregon about the potentially devastating physical effects of smoking its products.” The court ultimately determined that the 4:1 ratio was constitutionally permissible and directed remand for a new trial unless the plaintiff agreed to remittitur of punitive damages to four times the compensatory damages award. This is not likely to be the court’s last take on what is a constitutionally permissible punitive damages award.

In Goddard v. Farmers Ins. Co. of Oregon, an Oregon jury had awarded $20.7 million in punitive damages against Farmers after its failure to pay its $100,000 auto limit resulted in a $863,274 verdict against the insured.  The Oregon Supreme Court affirmed te jury's finding of bad faith, noting that:

In summary, we conclude that defendant's actions were directed at a financially vulnerable victim, were not confined to this victim alone, and involved intentional malice and deceit. On the other hand, defendant's actions caused economic harm only and did not evince a reckless disregard for the health or safety of others, although defendant is entitled to little credit for either factor -- cases of economic harm like the present one seldom provide malefactors with an opportunity to meet either of those criteria. Taken together, our analysis of the five reprehensibility factors set out in Gore, considered in light of the economic nature of defendant's wrongdoing, leads us to conclude that defendant's actions were very reprehensible.

Despite Farmers' argument that Campbell required a 1:1 ratio of punitive to compensatory damages, the Oregon Supreme Court concluded that a ratio of 4:1 was more appropriate.  Since the ratio here was closer to 16:1, the court held that a new trial limited to punitive damage was necessary unless the insured agreed to accept a reduced award based on a 4:1 ratio.

In calculating the ratio, the Supreme Court held that it was appropriate to consider pre-judgment interest awarded to the plaintiff in applying such ratios but that the amount of the damages was also properly reduced by the jury's finding of 20% comparative fault.

Oregon Rule of Civil Procedure 36B provides, in part, that the scope of discovery is that:

[P]arties may inquire regarding any matter, not privileged, which is relevant to the claim or defense of the party seeking discovery or to the claim or defense of any other party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things, and the identity and location of persons having knowledge of any discoverable matter. It is not ground for objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated to lead to discovery of admissible evidence.

The court stated that, on its face, this rule “would appear to extend a right to depose or otherwise to obtain discovery from all potential witnesses (whose testimony is not privileged) . . . including expert witnesses.” However, the court noted that it had previously held that “the scope of the rule was not intended to extend to expert witnesses.” However, the court stated that nothing in the wording of the rule “suggests that a witness who has been personally or directly involved in events relevant to a case may not be deposed as to facts of which the witness has personal knowledge, simply because that person will be, as to other matters, an expert witness at trial.” The court stated that counsel for the plaintiff would have every opportunity at the expert’s deposition to object to any questions that sought expert opinions to thus stay within the spirit of the rules and the court’s holding.

Philip Morris appealed and, after a lengthy appeal process, the Oregon Supreme Court concluded the punitive award comported with federal due process and that the proposed jury instruction incorrectly stated the requirements of federal due process and therefore the trial court did not err in refusing to give the instruction. On certiorari, the US Supreme Court concluded that due process prohibits a jury from using a punitive damage verdict to punish a defendant directly for harm to nonparties. Determining that the Oregon Supreme Court had applied the wrong constitutional standard to the proposed jury instruction proffered by Philip Morris, the Court vacated the Oregon Supreme Court’s earlier decision and remanded.

On remand, the Oregon Supreme Court determined that the trial court correctly refused to give the instruction because it contained several other errors completely unrelated to the issues addressed by the US Supreme Court. The Oregon Supreme Court found that the instruction misstated Oregon law in that it incorrectly told the jury that the factors to be used in awarding punitive damages were discretionary when they are mandatory according to state statute and that the instruction mischaracterized this statutory language by referring to a defendant’s “motivation to make illicit profits” as compared to the “profitability of the defendant’s misconduct” as set forth in the statute. The Oregon Supreme Court therefore reaffirmed its prior decision. Shortly after the release of this decision last week, Philip Morris vowed to appeal to the US Supreme Court. A substantive due process issue that the US Supreme Court found unnecessary to address in its decision last year will likely be the subject of the Philip Morris petition.

After the accident, the plaintiff sought to recover her medical expenses and lost income and filed a claim for PIP benefits under her automobile policy with State Farm. State Farm denied the claim on the basis that the accident was not the result of her “use” or “occupancy” of her car and, thus, fell outside the coverage prescribed under the terms of her policy and the Oregon PIP statute. On summary judgment motions of both parties, the trial court found that the facts “show that the injury resulted form the use of the vehicle [and was] a consequence resulting from plaintiff’s use of the vehicle to transport and store items.” The trial court found that it was immaterial that she did not intend to return to her car again after locking it and that she might have taken the dog for a walk after crossing the street had she not been injured and thus, her injuries resulted from her “use” of the car.

The Court of Appeals reversed finding that a causal nexus between the use of the plaintiff’s car and the injury by the cyclist was lacking. The court found that there must be a “consequential nexus between the use and injurious event” for recovery to occur. Accordingly, in this case, there was no nexus as the injured cyclist “was going to be there regardless of plaintiff’s use of the car –and, other than in a pure “but for” sense, nothing about plaintiff’s use of the car enhanced the likelihood that she would suffer an injury because of being struck by a cyclist.”

This insurance coverage case involved environmental contamination of the policyholder’s land and the nearby Willamette River in Oregon where the policyholder operated a vessel scrapping business for many years. The trial court originally found that the all of the subject policies provided coverage for losses arising by “accident” which the court held to mean an “unexpected and unintended event.” In determining whether the insured’s potential liability on an environmental contamination claim was the consequence of an unexpected and unintended event, the trial court placed on the insurer, Lloyd’s, the burden of proving that the event was “expected or intended” rather than requiring the insured, Zidell, to prove that the damage was “unexpected and unintended.”

At oral argument, Lloyd’s argued that “expected or intended” was a part of the coverage grant, therefore, the burden of proof of “unexpected and intended” should be with Zidell. Lloyd’s argued that the burden of proof was on Zidell because this term was part of the coverage grant. Further, the trial court recognized that the unexpected and unintended issue is a condition, rather than exclusion. If the panel accepts Zidell’s interpretation, the insurer argued that any grant of coverage that was less than unconditional and promised to pay any claim, under any condition, for any amount, would engulf the entire policy. Lloyd’s also argued that the burden of proof of unexpected and unintended damage should be on the party who files the declaratory judgment action.

Zidell’s counsel argued that the issue of “unexpected and unintended,” was an exclusion and therefore the burden of proof rested with the insurer. Zidell’s counsel argued that the party seeking the benefit of specific policy language had the burden of proof and because Lloyd’s was attempting to benefit from establishing that Zidell expected or intended that its discharge of waste would cause third party property damage, it therefore should carry the burden of proving the term. Zidell’s counsel further argued that “unexpected or unintended” was an exception to an affirmative grant of coverage and thus an exclusion that Lloyd’s was required to prove.

A decision from the court is anticipated later this year.