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

The scenario presented in the Holloway case is a common one: an insured settles a claim by stipulating to a large judgment and assigning its rights under the insurance policy to the tort victim in exchange for a covenant by the tort victim to not execute directly against the insured. Assuming the insurance policy contains an anti-assignment clause, the question then becomes whether or not the assignment is valid such that the tort victim can pursue a direct action against the insurer.

Oregon’s Court of Appeals surveyed the law of insurance policy anti-assignment clauses and noted that the majority of states hold that anti-assignment clauses only prohibit the assignment of “pre-loss rights or duties.” In other words, the anti-assignment clause prohibits an insured from substituting another insured in its place prior to any loss, but the clause does not prohibit the insured from assigning any rights that may accrue to it following a loss. This makes sense, the Court of Appeals noted, because it is perfectly reasonable that an insurer would want to “protect itself from the unknown risks to which an assignee insured might expose it.” Id. at 648. However, after a loss the parties’ rights are already fixed, so an assignment does not expose the insurer to any greater liability. Because the subject anti-assignment clause did not specify whether it applied to pre-loss rights, post-loss rights or both, the Court of Appeals found an ambiguity which it construed in favor of the insured.

The Oregon Supreme Court found that the Court of Appeals’ ruling stretched logic too far because “[t]he anti-assignment clause … is worded broadly; it contains no exceptions or qualifications.” Id. at 651. It was “unreasonable” to read “an exclusion into a broadly worded anti-assignment clause based upon the clause’s silence regarding its application to a particular situation.” Id. at 652. Because the clause was unambiguous, the attempted assignment was void. Accordingly, the tort victim could not proceed directly against the insurer.

The lesson from Holloway, in our opinion, is that even the most clearly worded policy provisions will be found ambiguous by a sufficiently motivated court. However, in Oregon, the trend is to reject manufactured ambiguities and to interpret insurance policies as they are actually written. Because the Holloway decision granted a degree of certainty to a traditionally uncertain area of the law, we recognize that case as the most significant insurance ruling in Oregon over the past decade. In our opinion, other states’ courts would be wise to follow its course.

The case turned on the interpretation of the undefined term, “policyholder.” The court first noted that the policy defined “you” and “your” as the policyholder and the policyholder’s spouse. The definition of “your” is relevant because the policy covered persons using the vehicle with “your permission.” Plaintiff asserted that the term “policyholder” must mean something different from “named insured” because both terms were used in the policy. The court rejected this argument. Applying common dictionary meanings, the court determined that “policyholder” means the “person who purchases and has the right to control the policy.” The court supported this position by concluding that the terms “you” and “your” refer to the named insureds and not other listed drivers, like permissive users. Since the daughter of the named insureds was not herself a named insured, she did not qualify as someone who could give permission for another person to use the vehicle. The court concluded that since the driver was not an insured, the insurer was entitled to a directed verdict regarding its duties under the policy.

The policy at issue contains a “Designated Work Exclusion” that bars coverage for “A. Condominiums, multi-unit homes, townhouses, or apartment buildings which contain 5 or more single family units. B. Any building or structure in excess of three (3) stories or any building or structure in excess of forty (40) feet in height.” The plaintiff contended that the undefined term “condominium” is ambiguous because the term is susceptible to more than one meaning, and when properly interpreted does not exclude coverage for plaintiff’s claims.

Employing Oregon’s rules to interpret the terms of an insurance contract, the court first determined whether the term has a plain meaning. Oregon courts may look to dictionary definitions to determine whether a term has a plain meaning. The plaintiff had provided a dictionary definition that “condominium” means either a building or complex containing a number of individually owned units, or the individual units. The court concluded that the dictionary definition established that “condominium” has more than one plausible meaning, and so the court examined the term in light of the context in which the term is used in the policy.

After examining the policy, the court rejected the plaintiff’s argument that the “Designated Work Exclusion” excludes only condominiums that “contain 5 or more single family units,” which the plaintiff argued demonstrates the insurer’s intent to exclude coverage of condominiums that are comparatively large buildings containing more than five single family units. The court also rejected plaintiff’s argument to apply the ejusdem generis principle of contract interpretation to the “Designated Work Exclusion.” In agreeing with the insurer, the court found that while the exclusion contains an enumeration of specific things (i.e., condominiums, multi-family homes, townhouses, and apartment buildings), that enumeration is followed by an even more specific description (i.e., “which contain 5 or more single family units.”). The court found that the application of the ejusdem generis doctrine does not establish either ambiguity in the “Designated Work Exclusion” nor indicate that the “Designated Work Exclusion” does not apply.

By applying Oregon’s rules to interpret the terms of an insurance contract, the district court concluded that both the plain meaning of “condominium” in the policy’s “Designated Work Exclusion,” and its meaning within the policy as a whole indicate that the “Designated Work Exclusion” applies to the project at issue, and the particular policy excludes coverage for the project.

Michelle’s parents were divorced. She lived with her father, Charles, and grandmother, Evelyn. Her mother lived with a man (Barnett) that had a homeowners policy with Safeco. The claim by the injured boyfriend was tendered under Barnett’s policy.  Safeco denied, was sued, and was ultimately (years and a court decision later) found to be correct.  See Safeco Ins. Co. v. Parks (2004)122 Cal.App.4th 779 (“Safeco I”).

During that bad faith case, discovery was sought of other policies issued by Safeco “providing coverage for the nature and extent of the damages alleged.”  Safeco objected to the discovery. Parks did not move to compel.

Behind the scenes (the Safeco II court tells us), Safeco knew Miller lived with her father. Safeco’s unit manager had apparently instructed the adjuster to determine whether Michelle had other applicable insurance. The court noted that Safeco’s claim file did not show it searched for policies for the adults with whom Michelle resided “nor did Safeco interview Michelle’s father or grandmother to determine whether they had Safeco policies that might cover her claim.”  No mention is made of whether the claimant’s lawyer deposed the father or grandmother or conducted any discovery for policies other than sending the request to Safeco, which the lawyer failed to pursue.

As it turns out the grandmother owned the home in which Michelle lived and had a homeowners policy with Safeco. Once this came to Safeco’s attention, Safeco acted promptly and paid policy limits.  But too much water was already under the bridge. There had been a policy limits demand and an excess judgment.

The lesson in all of this? Follow the claim supervisor’s instructions.  Search for logical sources of insurance coverage for a claim. Document any search conducted. Hindsight is always 20/20.

Because the lawsuit did not allege that Mt. Hood was a board member or subsidiary of the HOA, Travelers argued that Mt. Hood did not qualify as an insured. Mt. Hood claimed that since the complaint alleged that Mt. Hood controlled the board and the HOA for a period of time, Mt. Hood was effectively on the board. The court rejected this argument. Following Oregon law, the court determined that it could only consider the complaint and the policy when analyzing the duty to defend. The court found that in reviewing the complaint, it was clear that there was no allegation that Mt. Hood itself was a member of the board, even if it did control the actions of the board. The court focused on the allegation in the complaint that Hanna had been elected as the sole board member. The court granted Travelers motion to dismiss as to Mt. Hood’s claims.

With respect to Hanna, Travelers argued he was not an insured because the claims were filed against Hanna outside the policy period as required by the policy. Travelers argued that because the suit was not brought within the policy period, there was no coverage. The court found, however, that because the policy only required that a “claim” for monetary damages be brought against the board member within the policy period, the demand for money damages prior to the complaint qualified as a “claim” under the policy. Travelers also argued that an exclusion for damages arising out of construction defects applied. The court found that the policy’s coverage for “breach of duty,” and the allegations in the complaint, were broad enough, such that claims for damages other than solely construction defects could be recovered. The court, therefore, rejected Travelers motion to dismiss the claim for breach of the duty to defend Hanna.
 

At the trial court level, the insurer successfully moved for summary judgment, contending that “the plain and ordinary meaning of the word ‘repair’ in the policy did not incorporate a duty to pay diminished value.”  Id. at 5.  At issue was the policy provision limiting the insurer’s liability to “[t]he amount which it would cost to repair or replace damaged or stolen property with other of like kind and quality…”  Id. at 6.  Naturally, the parties offered competing definitions for the term ‘repair.’  The insured argued that the term “includes restoration of the preloss condition and value of the insured property,” but the insurer argued that the term “refers only to the restoration of the function and appearance of the insured property.”  Id. at 8.  The Supreme Court found that the sixty-seven year old case of Dunmire Co. v. Ore. Mut. Fire Ins. Co., 166 Or 690 (1941) controlled – and dictated a decision in favor of the insured – because Dunmire interpreted the word “repair” in a “virtually identical” policy provision. Gonzales, 2008 Ore. LEXIS at 17.

The Gonzales Court held: “[U]nder the policy at issue, if an attempted ‘repair’ does not or cannot result in a complete restoration of the vehicle’s preloss condition, the vehicles is not ‘repair[ed],’ and the resulting diminution of value of the vehicle remains a ‘loss to [the] insured car caused by collision’ for which defendants are liable under their policy.”  Id. at 18.  However, the Supreme Court limited its holding by noting that the decision was based on the subject policy’s terms rather than upon “principles applicable generally to diminished value claims in property damage disputes of all kinds.”  Id. at 6.  In fact, the Court explicitly stated that nothing in the current decision or in Dunmire “prevents insurers from including a definition of repair in automobile policies that excludes diminished value from coverage.”  Id. at 18-19.

The Gonzales decision sets the stage for further litigation over what qualifies as a compensable diminution in value.  In Gonzales, the insurer asserted that the insured’s argument “reduced to its essence” would require an insurer “to pay for diminished value that results only from stigma attached to that vehicle because the vehicle has been involved in a collision.”  Id. at 20-21.  The Court declined to address that argument because the insured had asserted more than just stigma but actual physical problems that did not exist prior to the collision.  The Court wrote: “[W]e need not decide whether the policy requires payment for a claim based solely on ‘stigma.’”  Id. at 21. Accordingly, a decision on that issue will have to await another day.

Despite somewhat equivocal testimony provided by Geico as to whether the disputed endorsement was sent with the renewal policy, the court accepted the endorsement as established, relying primarily on Wells Fargo Bus. Credit v. Ben Kozloff, Inc., 695 F.2d 940, 944 (5th Cir. 1982) (“Placing letters in the mail may be proved by circumstantial evidence, including customary mailing practices used in the sender’s business.”).  Citing Ben Kozloff, the court found that its decision was justified because no evidence was presented to rebut the legal presumption that “Once properly mailed, the endorsement is presumed to have been received by the insureds.” The court therefore allowed Geico to substitute what the court deemed to be the actual policy at issue for the one Geico had originally presented, and limited Geico’s liability to $25,000.