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.

In making its decision, the Court noted that some jurisdictions have held that an insurer is not vicariously liable for the actions of insurer retained defense counsel, while other jurisdictions have held that the insurer is so liable. The Court then noted that where an insurer is defending under a reservation of rights, as here, the Court had previously adopted the enhanced good faith standard that the insurer and retained defense counsel must follow, as established by the Washington Supreme Court in Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1133 (1986). In this context, defense counsel represents only the insured, and not the insurer. Furthermore, Admiral would not control counsel’s professional judgment as that would be prevented by the attorney’s ethical obligation to the client, Lifestar. The Court further adopted the reasoning of Feliberty v. Damon, 72 N.Y.2d 112, 120, 527 N.E.2d 261, 265 (1988) that 1) the duty to defend is delegable by its very nature because insurers are not attorneys, 2) the paramount interest counsel represents is the insured’s, not the insurer’s, and 3) the insured’s remedy for defense counsel malpractice is an action against defense counsel. The Court then held that Admiral could not be vicariously liable for defense counsel’s alleged negligence or wantonness, further pointing out that “an insurance company is prohibited from practicing law and must rely on independent counsel to conduct litigation.”

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.