In Desrosiers v. Hudson Specialty Ins. Co., 2011 U.S. App. LEXIS 12591 (9th Cir. Or. June 21, 2011), the Ninth Circuit found that an insurer had a duty to defend an insured against a complaint alleging negligence and intentional torts. The Ninth Circuit also found that the insurer had a duty to indemnify, stating that “an insurer that breaches its duty to defend may not later argue that it has no duty to indemnify.” 

In the underlying case, the plaintiff allegedly sustained injuries inflicted by an intoxicated patron outside the insured’s bar. The underlying complaint pled alternative theories: first, that the plaintiff’s injuries were sustained by the negligence of the intoxicated patron and the insured; and, second, that the intoxicated patron intentionally attacked the plaintiff. 

The insurer refused to defend the insured because it determined that the plaintiff’s claims fell within the scope of the policy’s exclusion for injuries arising from assaults or batteries. The underlying case reached a settlement, pursuant to which the insured assigned its rights under the policy to the alleged victim.   The alleged victim brought an action against the insurer to enforce these rights, and the district court concluded that the insurer had neither a duty to defend nor a duty to indemnify the insured under the policy. 

 

The Ninth Circuit reversed, finding that the allegation that the plaintiff’s injuries were caused by the intoxicated patron’s negligence fell outside the policy exclusion for intentional acts. To the Ninth Circuit, a rational jury could have found that the intoxicated patron was incapable of forming the requisite intent to commit assault or battery.

 

Based on its determination that there was a duty to defend, the Ninth Circuit held that the insurer also had a duty to indemnify. The Ninth Circuit based this holding on: (1) the insurer’s alleged concession that if it breached its duty to defend then it must indemnify; and (2) Nw. Pump & Equip. Co. v. Am. States Ins. Co., 141 Or. App. 210, 917 P.2d 1025, 1029 (Or. Ct. App. 1996). Specifically, the Ninth Circuit relied on language from Northwest Pump stating that "[w]hen an insurer wrongfully refuses to defend its insured on a claim that could impose liability covered by the policy and the insured, acting in its own defense, reasonably settles the claim, the insurer is liable for the amount of the settlement." The Ninth Circuit “agree[d] that an insurer that breaches its duty to defend may not later argue that it has no duty to indemnify.”

 

The precedential value of the Ninth Circuit’s holding with respect to the duty to indemnify is questionable.  Because the court found that the insurer conceded the point, it is unclear whether the Ninth Circuit would have reached the same decision again had it fully considered the issue. According to the insurer’s counsel, the insurer did not even concede this point; instead, the Ninth Circuit relied on the answer to a question that was misheard during oral argument. Further, the Court relied on a portion of the Northwest Pump decision that is no longer good law. Upon reconsideration, the Northwest Pump Court clarified that “an insurer’s breach of the duty to defend does not give rise to a duty to indemnify unless the underlying claim is covered.” Nw. Pump & Equip. Co. v. Am. States Ins. Co., 144 Or. App. 222, 925 P.2d 1241, 1244 (1996) (emphasis added). The Northwest Pump Court based this clarification on three principles: (1) the duty to defend is a contractual duty, and the measure of contract damages are “the benefit of the bargain”; (2) “the duty to defend is different from the duty to indemnify, and the breach of one does not, in and of itself, establish the breach of the other”; and (3) “the duty to indemnify cannot be extended by estoppel.”  According to the insurer’s counsel in Desosiers, the Ninth Circuit was made aware of this reconsidered opinion in the insurer’s brief. Thus, as the Derosiers decision contradicted both the Northwest Pump Court’s conclusion and the foundational principles, it appears the Ninth Circuit may have misunderstood and misapplied Oregon law.