Oregon In What Is Now Majority Across the County on Coverage for Construction Defect Claims

Really nice post the other day by our friends at DC-based Dickstein Shapiro on the recent change in tide on something that we in Oregon tend to take for granted: that construction defects that have resulted in property damage may be covered under the standard CGL policy.  Oregon courts have long employed a slightly different interpretation of the term "occurrence" in the standard coverage grant, which is one reason that Oregon has been in what is now the majority on this issue from the beginning of the construction defect boom.

Familiar Pattern Plays Out in Reversal of PGE v. Lexington Appeal

A familiar pattern played itself out on July 25 when the Oregon Supreme Court reversed an Oregon Court of Appeals decision that had favored an insurance carrier, finding that the Court of Appeals had too glibly taken the insurance carrier's argument at face value.  In PGE v. Lexington the policyholder, PGE, sued a number of insurance companies and served them all.  Through some sort of hiccup in its corporate department Lexington failed to respond to the complaint and PGE took a default for a significant amount.   Problem was, PGE failed to allege a specific amount of damages against Lexington in its complaint, which is a violation of Oregon's civil procedure rules.  Lexington tried to set aside the judgment in the trial on several grounds and failed, but the Court of Appeals held that that PGE's failure was jurisdictional and the judgment was void.  The Supreme Court reversed, holding that the judgment was merely voidable, and that Lexington had failed to show a due process violation.  The court remanded to the Court of Appeals to consider Lexington's other arguments.  (The pattern that I'm referring to is that the Court of Appeals frequently appears to side with the insurance industry, which the Oregon Supreme Court often appears more policy-holder friendly.  Vast generalizations, of course.)

"Bresee" Decision Applied by Oregon Federal Courts

We recently obtained a victory for one of our clients, a developer on the Oregon Coast, in a duty to defend fight with a very aggressive and creative opponent, Catlin Specialty Insurance Company.  Magistrate Judge Coffin's findings and recommendations, adopted by Judge Aiken, relied on the Oregon Supreme Court's Bresee decision to find a duty to defend where the allegations in the underlying case were unclear about whether the property damage fell into a policy exclusion.  This is a difficult case because according to the insurance company the policy has both an "owned property" exclusion and a "products-completed operations" exclusion, meaning (according to the insurance company) that the policy excluded all damage to the condo units before they were sold to customers, and after they were sold to customers - meaning that nothing would be covered!  The case is ongoing, but it was gratifying to have a federal judge (again) recognize the Bresee decision's impact on this area of coverage law.

*Disclaimer: success in this case, or any other case, does not guarantee success in any other case.

Insurers Start Duking It Out Over Impact of SB 814 on Oregon Environmental Coverage Law

Ironically enough, the first attempt that I've heard of to take advantage of the new pro-policyholder provisions of the Oregon Environmental Cleanup Assistance Act (OECAA) was by an insurance company.  That effort, in the form of a motion to dismiss recently filed in the Multnomah County Circuit Court Lloyd's of London v. Beneficial Insurance case, is here.  As I've reported in earlier posts, one provision of SB 814 (which went into effect in early June) added "contribution protection" to the OECAA.  To put it very simply, the provision has this effect: if insurance company A settles a coverage claim with the policyholder in good faith, and the policyholder also sues insurance company B over the same loss and wins, insurance company B can't then sue insurance company A for contribution, arguing that insurance company A didn't pay its righteous share of the loss, and insurance company B overpaid, so company A owes company B.  The idea behind the provision was to encourage insurance companies to settle these claims early, by removing the fear that they will then have to pay again if sued for contribution.

The Lloyd's of London v. Beneficial Insurance contribution case arises out of the Zidell "Moody Avenue" contaminated site (not the Portland Harbor Superfund Site).  Zidell settled early on with Beneficial, then went after Lloyd's, and tagged Lloyd's for a considerable amount (that litigation is still going, after having gone up the appellate court ladder several times, like the contribution case).  Lloyd's sued Beneficial for contribution.  Judge You, who has had this case at the trial level for some time, earlier ruled that because of the date of the DEQ enforcement action against Zidell, the OECAA does not apply to the case.  Beneficial is now trying to both undo that ruling, and assert that the Lloyd's claim is barred by the contribution protection provision of SB 814.  This motion is just the opening salvo.

I can't say I'm unhappy about insurance companies having to spend money on very good lawyers on both sides of a dispute that may help clarify how this new provision of the OECAA, and perhaps related retroactivity and constitutionality problems, will work out in practice.  Stay tuned, as always.

Insurers Chalk Up a Victory for Form Over Substance in D&O Coverage

Kevin LaCroix over at the D&O Diary has a nice piece on a new decision out of the Carolinas that has us insurance geeks talking, GS2 Engineering v. Zurich.  The case puts front-and-center one of the most notorious and difficult "form over substance" claim denial practices in the liability insurance industry, where professional liability or Directors and Officers coverage is involved: that a claim was not reported during the right policy year.  These kinds of policies are what is known as "claims made" policies, meaning that the policy will only provide coverage if the liability claim (demand letter, lawsuit, whatever) was made against the insured during the policy year.  Pretty straightforward so far.  But where it gets tricky is when the claim has to be reported.  The policies break down into multiple camps on that front: they may be "claims-made-and-reported" (meaning the claim must be "reported" to the insurer during the policy year) or purely "claims made" in which case it doesn't matter when the claim is "reported" so long as its reasonable - or it may be some kind of hybrid.  It matters because generally if the policy is just "claims made" then if the reporting is "late" the insurance company has to show "prejudice" in order to deny the claim.

In the GS2 case the policy was (in my view) in that hybrid realm meaning that there needed to be a showing of prejudice.  The claim was made during the policy year but reported during the next policy year.  Tough toenails for the insured, said the court, which decided that the policy was "claims-made-and-reported."  The insurance company didn't have to show that it was prejudiced in some way by the "late" reporting.  The real kicker here is that as often happens the "next" policy year was a renewal with the same insurance company!  How's that for "the customer is always right!"

As Kevin observes (much more eloquently than I ever could) the rhetoric from the carriers and often the courts in these situations frequently takes on a moralizing, parental kind of tone: "You should have been more careful about when you reported this - maybe next time you'll have learned your lesson!"  That is absolutely the wrong way to look at this issue, IMHO.  These are contracts of adhesion with tremendously confusing language that nevertheless play an important part in advancing sound public policy about allocation of risk.  Permitting carriers to evade their contractual responsibilities without having to show prejudice, particularly when the policy is renewed, erodes public confidence in insurance generally, in these large financial institutions, and in the rule of law.

Professional Liability Insurance: Problems with Pure Claims Made and Reported Policies : The D & O Diary:

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Something That Insurers and Policyholders Can Agree On...

Is that the building where a lot of Oregon's insurance disputes are decided, the Multnomah County Courthouse, needs to be replaced.  Hopefully the Legislature's allocation of some new funds for planning will push the project into reality-land, although we have all had our hopes raised before.  Our state-court judges are under enough stress with low pay, staffing cuts, and having to juggle administrative tasks with serving the needs of justice - they deserve (and the taxpaying public deserves) safe and functional accommodations to do the people's work.

$15M revives plans for a new Multnomah County Courthouse - Portland Business Journal:

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Washington Court Smacks Down Lloyd's Effort to "Cook the Books"

Subcontractors on construction projects are commonly required to provide "additional insured" liability coverage to the general contractor.  The coverage is available to the extent that the general is liable because of the subcontractor's negligence - which is the case most of the time.  In Oregon it is rare for a subcontractor's carrier to actually agree to defend a general contractor because of a lack of bad faith exposure.  However, in Washington it is much more common, thanks to Washington's pro-policyholder coverage law.  That makes it much more expensive for the subcontractor's carrier, who has to defend two entities.  In this case the carrier for the subcontractor, Lloyd's, tried to terminate its obligation to defend the general contractor by paying for the subcontractor to settle with the underlying claimant, and including language in the settlement agreement "stipulating" that the subcontractor actually had no liability (obviously a subterfuge, because if that were true Lloyd's would not have settled the case).  Then Lloyd's stopped paying to defend the general contractor.  In a coverage action between the general's carrier (Zurich) and Lloyd's, Judge Bryan saw clear through Lloyd's breach of its duties to its additional insured, the general, denying summary judgment to Lloyd's for breaching a contractual duty to defend, and suggested that there may be a claim for bad faith in there as well.

We see these kinds of aggressive carrier tactics every day.  It is nice to see a judge calling a carrier out on it.


ZURICH AMERICAN INSURANCE COMPANY v. CERTAIN UNDERWRITERS AT LLOYD'S LONDON, Dist. Court, WD Washington 2013 - Google Scholar:

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Alabama Federal Trial Court Dismisses Bad Faith Claim Over Defense of PRP Letter

One of the issues that we cover closely is environmental coverage litigation, and particularly coverage issues similar to the coverage fights that are taking place about the massive Portland Harbor Superfund Site.  Our firm has been at the forefront of making good law on those coverage issues including the first decision establishing that carriers have a duty to defend against the EPA's coercive "104(e)" information request demands, and also establishing that under Oregon law carriers have a duty to defend a "Potentially Responsible Party" (PRP) letter.  Both of those cases were decided under Oregon's somewhat unique state law, but in arguing about the PRP letter issue we noted that almost all other states have decided that a PRP letter triggers the duty to defend, including just recently (December 2012), Alabama.  Unfortunately, for a variety of reasons, the policyholder who won that dispute about the existence of the duty to defend has now lost out on its bad faith claim, because the trial court determined that when the insurance company denied the claim the issue was fairly debatable, and therefore the decision was not made in bad faith.  This is an excellent illustration of how, even if Oregon caught up to most of the rest of the nation by enacting a bad faith cause of action (like HB 3160), insurance companies can often still avoid paying for taking aggressive coverage positions, rather than stepping up to the plate and giving the benefit of the doubt to their policyholders.

ALABAMA GAS CORPORATION v. TRAVELERS CASUALTY AND SURETY COMPANY, Dist. Court, ND Alabama 2013 - Google Scholar:

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Associated Oregon Industries Fails to Mention Opposition to HB 3160 In Legislative Recap

Perhaps there's an entirely innocuous explanation as I'm sure that AOI opposes many bills each session, but I found it notable that AOI's blog posting on the legislative session does not mention its opposition to HB 3160.  That bill would have provided businesses (and individuals) with a private right of action against insurance companies for unfair claims handling practices, creating a dramatic disincentive for the current practice (by liability insurers, in particular) of denying a claim first, then seeing if the insured has the wherewithal to hire an attorney to press the claim, and then if necessary "reconsidering" and accepting the claim- risk free, because there is no penalty in the current law for taking this "free breach" approach.  AOI came out against the bill reportedly at the instance of some big players in the group including Liberty Mutual and The Standard.  However, I'd wager a pint of your favorite local microbrew that the average AOI member had more to gain from HB 3160 than to lose.  Putting on my conspiracy theory hat (an occupational hazard of someone who litigates against big insurance companies for a living), perhaps that has something to do with the omission of HB 3160 from this update.


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