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.

Plaintiff then brought a breach of contract and bad faith lawsuit against Illinois Union for its alleged failure to properly settle the underlying suit. After two rounds of summary judgment motions and trip up to the Ninth Circuit, the issues were narrowed for trial and plaintiff grudgingly accepted Illinois Union’s $425,000 Offer of Judgment, exclusive of costs and fees. Plaintiff then filed its motion for $473,930.68 in claimed attorney fees and costs.

Magistrate Judge Papak found that the plaintiff wholly failed to “verify” the $40,137.93 in claimed costs. Id. at *11-12. Although Judge Papak allowed plaintiff leave to file an amended cost bill, he advised plaintiff that it could not “recoup costs for courier, mail, telephone, [] computerized research [,]travel expenses [,] costs of a mediator [,] outside counsel [,]” and many other claimed costs because they were “‘plainly not recoverable.’” Id. at *12-15. Plaintiff did not file an amended cost bill and, therefore, recovered no costs.

On the issue of recoverable attorney fees, Illinois Union’s threshold argument that ORS 742.061 should not apply because it never “denied” coverage, but simply contested the extent of available coverage was rejected. Id. at *19-22. Illinois Union’s argument that the plaintiff’s underlying complaint did not constitute a requisite “proof of loss” under ORS 742.061 sufficient to trigger its indemnity (as opposed to its defense) obligations was also rejected.   Relying on the Oregon Supreme Court’s recent decision in Parks v. Farmers Ins. Co., 347 Or. 374 (2009), Papak found that plaintiff’s underlying complaint, even though for unspecified damages, provided “sufficient information for Illinois Union to estimate its indemnity obligations.” Id. at *17-19. Judge Papak did, however, agree with Illinois Union on the apportionment of fees between the contract and the bad faith claims finding that they did not share “common issues”, reducing recoverable fees by over $104,000. Id. at *22-25. And Papak reduced plaintiff’s recovery by roughly another $60,000 pursuant to several ORS 20.075 “reasonableness” factors, including plaintiff’s unreasonable pursuit of settlement. Id. at *20-37.

The sufficiency of what constitutes a “proof of loss” under ORS 742.061 continues to be diluted.   However, arguing for the apportionment of recoverable fees between the contract claim and (the inevitable) bad faith claim remains a viable weapon in contesting policyholder attorney fee claims. The District Court is also proving to be a better venue for mitigating fees claims based on their overall “reasonableness” relative to the substantive claims at issue, the parties litigation conduct and the sufficiency of the petition.

-Submitted by Lloyd Bernstein, Gordon & Polscer, LLC

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.