Oregon Trial Court Adopts "All-Sums" In Environmental Coverage Case

A great win last month for the Zidell real-estate group (owner of much land in the South Waterfront area of Portland, including a historic ship-repair yard) in the longest-running environmental contamination case in Oregon history: a Multnomah County judge held that Zidell's carriers must pay for environmental remediation based on the "all sums" approach.  (Click here for Zidell's reply brief in support of its motion for summary judgment, and here for the court's order granting Zidell's motion).

The case centers around costs that Zidell paid many, many years ago to clean up contamination portions of the Willamette River in downtown Portland upriver from the Portland Harbor Superfund Site.  The dispute, which is between Zidell (or really its "ZRZ Realty" entity) and numerous carriers including various Lloyd's syndicates, is back in the trial court after its umpteenth trip into the appeals courts.  Recently, the court was asked to decide (among other things) whether the insurance carriers could limit their indemnity obligations based on the so-called "time on the risk" approach, where each carrier only pays in proportion to the number of years that it issued policies to the insured, meaning that if the insured settled with other carriers, or was uninsured for any years, there could be large portions of the costs that are not reimbursed.  The alternative is the "all sums" approach, in which the carrier is liable to pay for all of the property damage if there was property damage during any of its policy years, up the limit of its policies.

The Oregon Environmental Cleanup Assistance Act (OECAA) specifically wrote the "all sums" approach into law for certain policies, and, separately, there is Oregon case law endorsing the "all sums" approach.  Zidell's carriers, however, argued that the OECAA's provisions could not apply to them, and that the "all sums" approach is unfair.  The arguments on both sides are complex and detailed.  Fortunately, the Multnomah County Circuit Court saw the light and rejected the carrier-side arguments, holding that the indemnity obligations will be resolved based on "all sums."  This appears to be the first of hopefully many trial-court decisions adopting the "all-sums" approach in connection with indemnification for environmental liabilities in Oregon.  As the date for issuance of the ROD in the Portland Harbor comes nearer (although several years away), decisions like this one (which will hopefully be affirmed on appeal) will help shape the resolution of hundreds of coverage disputes over paying the billion-plus tab to clean up the downstream portions of the Willamette.

Oregon Environmental Coverage Mediation Program Launched

In 2013 the Oregon Legislature passed SB 814, which amends the Oregon Environmental Cleanup Assistance Act, a unique law regulating environmental coverage disputes.  Part of SB 814 required the State to set up a mediation program for such claims (and made a carrier's refusal to participate in mediation a prohibited claims practice).  That mediation program is now "live."  Here is the announcement from the State's ADR coordinator.

Mediation Case Manager (MCM) has been selected to manage the Environmental Claims Mediation Program established by SB 814 (2013.)  Under the terms of their contract, MCM begins offering environmental claims mediation services today, November 19, 2014.   MCM has established a program website that includes an initial list of qualified mediators and links to case initiation forms. That website is:  https://ecmp.mediationcasemanager.com/Site/index.html.     Additional program information, including the program rules effective October 31, 2014 , are available on the Department of Justice website at: http://www.doj.state.or.us/adr/pages/environmental_claims.aspx.  

We were honored to participate in drafting the regulations that set up this program and in helping select the vendor to administer this program, and are very pleased to see it up and running!

Or. Fed Court Rejects "Hail Mary" Insurer Argument Against Attorney Fees

The dispute between Schnitzer Steel and its carriers over defense at the Portland Harbor Superfund Site has been addressed many times in this blog, because it has raised many novel and fascinating (to me, anyway!) issues.  Here is the latest: on November 12, 2014 Judge Mosman ruled on Schnitzer's motion for attorney fees after Schnitzer prevailed completely at trial this last April, recovering more than $8 million in defense costs.  Schnitzer then requested nearly $3.5 million in fees under ORS 742.061.  In response, the carriers tried a "hail mary" to zap the fee entitlement entirely: they argued that because the statute applies only to actions brought on an insurance policy "in any court of this state," and because actions brought in federal court are brough in a court in Oregon but not of Oregon, the statute did not apply.

Judge Mosman found the argument worthy of some consideration, but ultimately rejected it.  Judge Mosman held that under Erie and consistent with the purposes of the statute, a federal court in Oregon is a court "of the state."  The court noted that any other result would produce an anomaly: a case in an Oregon state court applying Oregon law would result in a fee award, whereas the same case that was removed as of right by an insurance carrier to federal court would not.

This is another important development in the protection of one of the few levers available to policyholders in Oregon because other than in the environmental arena (as of last year), the conventional wisdom is that there is no "bad faith" remedy where an insurance carrier denies a defense under a liability policy.  However, given the size of the attorney fee award (nearly all of what Schnitzer requested), the carriers certainly have an incentive to raise this issue again on appeal.

Oregon Environmental Coverage Decision Emphasizes Importance of Early Tender

A new decision from the Oregon federal court emphasizes the need to tender any kind of potentially covered claim as early as possible.  The decision was, by and large, a win for the policyholder, but as noted at the end of this post the court carved out a large chunk of costs based on the timing of notice.

The decision, issued on October 28, 2014, came from Magistrate Judge Stewart in the long-running coverage dispute between Siltronic Corporation and its primary layer and excess carriers over costs for both cleanup of some of Siltronic's property within the Portland Harbor Superfund Site ordered by DEQ, and defense against the EPA claims at the Harbor.  The claims against Siltronic involved both contamination of soil, and river sediment, by TCE and MGP (Manufactured Gas Product).  Siltronic had seven potentially applicable policies, from 1978 through 1986, with Wausau as primary and Granite State as excess.  Wausau initially provided Siltronic with a defense under policies from 1980 through 1986, until Judge Stewart held that Wausau could stop defending the company because the primary insurer had paid to clean up TCE contamination and in so doing exhausted those six years of coverage.  Siltronic's excess layer carrier has been paying to defend the company since then.

The issue presented for Tuesday's ruling was what to do with the 1978 - 1980 policy.  Wausau had not been defending under that policy because Siltronic had not produced TCE until 1980, and Wausau contended that Siltronic had not tendered defense of  the MGP contamination.  Judge Stewart rejected that contention, noting that the DEQ letters and orders relating to the cleanup and included both MGP and TCE, and that therefore under the "eight-corners rule" in which the court only looks to the "four corners" of the policy and the "four corners" of the complaint (or equivalent), the tender had included MGP.  Wausau also contended that it had no duty to defend under the 1978 policy because Siltronic had not actually incurred costs to defend against MGP-related liability, because NW Natural Gas, the successor to the prior owner of the MGP-contaminated site, had agreed to pay for cleanup.  However, the evidence did not clearly establish that Siltronic had no potential future liability for the MGP contamination due to the agreement with NW Natural.   Questions about whether Siltronic had incurred defense costs related to MGP were questions for trial on damages, according to the ruling.

The court did exclude from consideration, however, a seemingly large chunk ($450,000) of defense costs incurred by Siltronic relating to the contamination.  It appears that Siltronic did not tender the DEQ and EPA communications to any carrier until TCE issues came to light, which was a few years after Siltronic had begun incurring costs relating to MGP.  Judge Stewart held that under the "voluntary payments" provision of the policies Wausau was under no obligation to pay any pre-tender defenses costs.  This reading of the voluntary payments provision has become the accepted wisdom among Oregon's federal courts, although policyholders continue to challenge it.

The take-away is this: tender early, and tender everything that could be a claim or suit, and do not equivocate about seeking a defense.

Ninth Circuit Asks Alaska Supreme Court Whether Recoupment Available to Insurers

Recoupment is the term most often used to describe the effort by an insurer to get back, from the insured, defense costs paid out where the claim was ultimately not covered.  Some kinds of policies -- principally professional liability and D&O policies -- have policy provisions specifically providing insurers this right.  (And, incredibly, some carriers without such provisions in their policies attempt to assert this right in their reservation of rights letters!)  Recoupment is controversial because if the right is asserted, it is a sword of Damocles hanging over the head of the insured as the underlying litigation progresses, and has in some cases impacted the resolution of an underlying case.

Alaska, by statute, requires insurers to pay for independent counsel where the defense is being conducted under a reservation of rights.  It contains no provision allowing recoupment, but that leaves open the question of whether an insurer may do so if the parties have agreed to recoupment by contract.  The Ninth Circuit, in Attorneys Liability Protection Society v. Ingaldson Fitzgerald, P.C.,, has now asked the Alaska Supreme Court to answer that question, which will no doubt involve not just the intent behind the statute, but also Alaska common law, which provided the genesis for the "independent counsel" requirement in the first place.  See CHI of Alaska, Inc. v. Emp'rs Reinsurance Corp., 844 P.2d 1113 (Alaska 1993).  This is an increasingly important issue for all kinds of policyholders, as the increasing costs of defending almost any sort of claim have increased the incentives for carriers to exercise their recoupment rights.

Montana Decision Has Lessons for Drafting Indemnity Provisions

A new decision from the District of Montana, WBI Energy Transmission v. Colony Insurance, illustrates the dangers of a vaguely-worded additional insured requirement in a contract.  In WBI a pipeline worker employed by a mid-tier contractor, "Pro Pipe" was injured; after collecting from worker's comp, he sued both the owner (WBI) and the sub-contractor.  The owner tendered to Pro Pipe's carriers as an additional insured ("AI") on Pro Pipe's general liability policies, which contained a blanket AI endorsement (in other words, the endorsement provided AI coverage to the extent required in any contract that Pro Pipe entered into).  The liability carriers contended that WBI was not an additional insured because the underlying contract was ambiguous about whether Pro Pipe was required to add WBI as an AI.  The contract stated that Pro Pipe was obligated to "maintain . . . minimum insurance coverage[] . . . to protect [WBI] against liability in connection with Pro Pipe's work." (emphasis added).  

The District Court held that that language -- in combination with the fact that Pro Pipe believed it was required to provide AI coverage, and had given WBI a certificate to that effect -- was not ambiguous, and that WBI was an additional insured.  The court's decision is cleanly-reasoned and worth reviewing.  But the larger lesson is that such problems can be avoided by careful contract drafting and occasionally having a lawyer experienced in insurance issues review form contracts and insurance requirements to make sure that the language matches the expectations in then event that something goes wrong.

Wash. Federal Court Broadly Applies "Ongoing Ops" Exclusions

In a decision from mid-summer, Judge Rice of the Eastern District of Washington – a relatively new judge in a jurisdiction without a lot of coverage decisions – broadly applied what are known as the “ongoing operations” or “business risks” exclusions, completely voiding the damaged party’s recovery, demonstrating the devastating impact that subtle coverage issues can have, and emphasizing that pro-insured Washington isn’t always so friendly to creative coverage arguments. 

In Western Heritage Ins. Co v. Cannon, a general contract failed to compact fill soils before laying the foundation on a large custom home, resulting in structural failure of the building – signs of which were observed during the construction – and the home eventually being condemned.  The contractor stipulated to  covenant judgment, and the homeowner and carrier filed cross-motions for summary judgment in the ensuing coverage suit. 

The insurance carrier argued among other things that coverage was barred by the “j(5)” and “j(6)” exclusions, which in simple terms exclude from coverage property damage to “that particular part” of the property on which the insured was working if the damage occurred during ongoing operations (as opposed to a latent defect that causes damage after the project is complete).  The homeowner argued that the “particular part” was the fill that the contract failed to compact, which the property damage was to the foundation, and other parts of the structure.

The court didn't buy the owners’ argument.  The court noted that Washington courts have broadly interpreted the j(5)/j(6) exclusions, and rejected a comparable Arizona case adopting a narrow interpretation in similar loose-fill situation.  Judge Rice held, in essence, that the general contractor was working on the fill, and the house, at the time of the property damage, making all of the project “that particular part.” 

In most situations like this one there would be some property damage after completion of the project, and the contractor would have purchased what is known as “Products-Completed Operations Hazard” coverage.  But here the contractor appears not to have purchased that coverage.  So the court held that the owners were completely out of luck.  This is an excellent object lesson that Washington law is not always favorable to the insured, and that any owner contemplating a stipulated judgment arrangement needs to evaluate the considerable risks that they may come up empty-handed.

Ore. Fed. Ct. Considers Meaning of "Occurrence" for Developer Liability

In a decision handed down earlier this week in litigation between a primary-layer carrier and an umbrella carrier an Oregon federal court held that when a plaintiff brings a claim against a developer for negligence, the term "occurrence" in the developer's policies means the negligent development, globally: in other words, the developer's negligent work is one occurrence, despite the fact that the property damage may take multiple forms.

The case involves a high-rise condominium in Portland's South Waterfront district.  The condo association sued the developer (not the general contractor) over water damage arising from construction deficiencies that led to water problems in the garage, and elsewhere.  The primary layer policy (from American Contractors Insurance Group or "ACIG") had a $2 million per occurrence limit and a $4 million products-completed-operations aggregate limit.  AIG, the umbrella carrier, insured over the same limits (called the "retained limit").  However, the Court noted that the AIG policy had its own definition of "occurrence" and provided coverage independently of the primary layer policy subject only to the retained limit - it was true "umbrella" coverage, not excess coverage.

Both the primary layer carrier and AIG contributed to a settlement.  But AIG contended that the primary layer carrier should have been required to pay its $4 million aggregate before its policy was triggered, and so sued to gets its contribution to the settlement back.

The Court disagreed.  The Court rejected AIG's effort to rely on case law interpretations of "occurrence" and instead examined the AIG policy's definition of "occurrence" on its own terms.  The AIG  provision included some standard language about an occurrence including multiple exposures to the same "conditions."  The Court found that the "condition" implicated by the condo association's allegations, read strictly, was the negligent development overall of the project - not particular construction practices by the general contractor.  The Court found it significant, in this regard, that the condo association had not brought the general contractor into the suit.  The Court determined that there was therefore only one "occurrence" for purposes of the AIG policy's retained limit condition.

Overall, this decision re-emphasizes for insurance professionals the importance of examining policy language on its own, without relying on court decisions that may or may not be applicable, and also carefully examining what is actually alleged in the underlying litigation rather than assuming things based on what is usually alleged in construction defect litigation.

Wash. Fed. Court Orders Trial on AIG Defense Rates

The long-running federal court litigation between Washington company Coinstar/Redbox and its insurer, AIG, took a turn last week, with good news and bad for the policyholder.  The backstory: Redbox has been sued in several different jurisdictions for collecting information about its customers that it was not permitted to collect; the allegations are, generally, that Redbox used the information for its own marketing purposes or sold it to others.  AIG agreed to defend Redbox under a reservation of rights in all of the actions, but brought this action seeking to be excused from further defending.  Redbox counterclaimed, alleging that AIG had taken too long to reimburse it for defense costs and was trying to impose unreasonable caps on the attorney rates it would pay.  (A few weeks ago we reported on a discovery ruling, allowing discovery of what rates AIG pays defense counsel in other cases, and in coverage cases).

Several months ago the court granted AIG summary judgment on defense of one of those lawsuits; last week, the trial court granted AIG summary judgment on whether AIG had to defend the two other pending lawsuits.  That's the bad news, but somewhat unsurprising given the court's prior ruling and the breadth of the statutory-violation exclusion at issue.  That said, there is some puzzling language in the order about how AIG didn't benefit from delaying payment of defense fees - a strange statement in light of the publicity recently about insurance companies profiting from "the spread."

The good news concerns the rate dispute.  AIG had contended that its insurance policies, which contain standard duty/right to defend language, gave it the absolute right to control the defense and, along with that, set whatever rates it chose.  The problem for AIG is that it had allowed its insured to choose defense counsel, and had not attempted to control the choice of defense counsel.  So the court held that AIG had effectively given up the right to control the defense.  Moreover, the court observed that the insurance contract said nothing about controlling the rates, or what rates it would pay.  The court held, however, that AIG only had to pay "reasonable" rates, and that there was a question of fact about whether the rates that Coinstar had paid its lawyers was reasonable.  So that dispute will remain for trial.  It would not be surprising for this case to settle before that happens, however, as AIG may seek to avoid having any of the information about what it pays defense counsel in other cases from becoming public.

(The exclusion that operated here is typical of the broader trend toward excluding privacy-related risks, including data breach and other "cyber" risks - and is one of the reasons that many companies are looking to add specialized "cyber insurance" to their risk-management programs.  More to come on that point in this blog.)

WA Fed. Court Broadens When Insurer May Go Beyond Complaint to Deny Defense

In Allstate v. A.R., a late-July decision from a federal court -- the Western District of Washington -- the court held that an insurer may rely on facts outside the "four corners" of the complaint to deny the duty to defend if the issue is whether the plaintiff is an "insured" under the policy and therefore subject to an "insured-versus-insured" type exclusion.  In the underlying case a minor sued her mother for negligently permitting her to be alone with her grandfather, who abused the minor.  The mother's homeowner's insurance policy with Allstate had an exclusion for claims brought by another "insured" and defined "insured" to include any relative who "resided" with the insured defendant.  The underlying complaint did not specify whether the minor lived with her mother, although in fact the minor apparently did live with her mother most of the time, but also lived sometimes with her father, and with her grandparents.  Allstate investigated where the minor resided, and came to the conclusion that the exclusion applied.



In the coverage case the minor protested that Allstate was not permitted to go outside the "four corners" of the complaint and that doing so was bad faith.  The court noted that in Woo v. Fireman's Fund the Washington Supreme Court had held that an insurer can investigate facts relating to whether a defendant is an insured and rely on those facts in its defense coverage determination.  The court then extended the Woo reasoning to coverage Allstate's investigation into the minor's living situation, reasoning that the question Allstate was trying to answer was whether the minor was an "insured," and held that the exclusion did apply, and that Allstate had not acted in bad faith.



The problem with the court's reasoning, of course, is that Woo did not concern a policy exclusion, and Washington courts have held that an exclusion may not be the basis for a denial of defense based on extrinsic evidence.  The court's characterization in this case of Allstate's investigation as involving "insured status" is facile - what Allstate was really investigating was an exclusion.  And the court's extension of Woo to this situation is not supported by Woo's reasoning, which has everything to do with helping defendants get coverage.  Because of this flaw this case may be the subject of an appeal, so stay tuned.

Oregon Federal Court Affirms Breadth of Duty to Defend

An Oregon federal judge recently reaffirmed a broad approach to the duty to defend in a carrier-on-carrier dispute.  The case is Seneca Insurance v. James River Insurance.  As with many such cases in Oregon, the dispute centered around defective construction, this time on the coast.  Plaintiff insurer, Seneca, agreed to defend its insured, a contractor.  Seneca sued one of the contractor's other insurers, James River, after James River refused to help fund the defense.   James River argued that the property damage alleged in the complaint must have started before its policy kicked in, in mid-September, 2011.  But the complaint did not specify when exactly the property damage happened.  And as we know, the duty to defend is determined only by looking at the complaint and the policy - the "eight corners" rule.

The court lambasted James River for interpreting ambiguities in the complaint to exclude coverage, stating that James River was in most cases "looking through the wrong end of the telescope."  (Love that phrase!)  The complaint alleged that the work was done in the late summer of 2011, and so James River argued that because "rain fell" and "wind blew" in the fall of 2011, property damage must have occurred then.  The court rejected that argument as assuming too much about un-alleged damage.  The court also flatly rejected James River's argument that the reference to "fall 2011" in the complaint referred to the beginning of September as contradicted by meteorological science.  Finally, the court also held that James River was not entitled to rely on the insured's third-party complaint against downstream parties (sub-contractors and others) to deny the defense, strictly applying the "eight-corners" rule.

Idaho Court Gives Win to Policyholder Where Exclusion Conflicts With Coverage Grant

Policyholders celebrated a win from Idaho's federal courts in IDAHO TRUST BANK v. BancINSURE, INC.,  involving a conflict between an exclusion and the coverage grant.  Here's a brief  factual set up: a bank agreed to loan money to its customer to buy steel to build  a new building.  The bank failed to come through with the loan and company sued.  The bank's insurer (under an Errors-and-Omissions type policy) defended the bank under the "lender liability" coverage portion.  This is a common provision in bank policies, covering errors committed in making a loan, failing to make a loan, or connected with making a loan.  The bank and the company settled round 1 of the litigation, but the bank somehow failed to live up to its end of the bargain, resulting in the litigation being revived, and the company adding claims against the insured bank for breach of the settlement agreement.

After some procedural maneuvering in the underlying case the insurer pulled its defense, whereupon coverage litigation began.  The bank and its insurer filed cross-motions for summary judgment.  The insurer first asserted that the claim relating to the settlement agreement was not interrelated with the original claim, and since it had stopped insuring the bank after that original claim came in, there was no coverage (these policies are of course "claims made" policies).  The court rejected that argument, relying on the abundant case law interpreting the standard related-claims language to be very, very broad, and the somewhat muddy factual record about whether the insured had admitted that the claims were independent.

The insurer also relied on its policy's "contractual liability" exclusion as precluding the claim for breach of the settlement agreement. However, the court noted that the coverage part that had clearly applied to the original complaint - coverage for "lending liability" - defined lending in terms of an "agreement" with someone to make a loan.  Therefore, there was a conflict between the coverage grant for "lending liability" and the contractual liability exclusion.  The court held that an insurer cannot enforce an exclusion that eats so directly into the promised coverage, and refused to interpret the contractual liability exclusion so broadly that it would exclude a breach of contract claim that arose out of a failure to make a promised loan.

Thanks to two other bloggers: D&O Diary and Jones Lemon Graham's D&O Digest, for tipping me off to this Northwest case.

Washington Federal Court Orders Broad Discovery of AIG Defense Rates

A significant win for policyholders in a discovery dispute over internal carrier records.  AIG and Coinstar/Redbox have been locked in coverage litigation in the Western District of Washington for some time over AIG's obligation to defend Redbox in several class actions alleging that Redbox has violated privacy laws in its handling of consumer information.  Redbox lost a critical motion in February, when the court granted AIG summary judgment on the duty to defend some of those claims because of a broadly-worded statutory violation exclusion.

But another aspect of the dispute is the rates that AIG has been paying Redbox's defense counsel.  It appears that Redbox chose counsel that it thought would do the best job, but that AIG has refused to pay those lawyers' full rate, instead only agreeing to pay "panel" rates.  Redbox, apparently, is paying its lawyers the difference between what AIG will reimburse and the full rate, and that differential is now over $2 million.  These kinds of disputes are, unfortunately, quite common in high-stakes litigation where companies want to choose highly-qualified counsel for themselves.

In an effort to show that AIG acted in bad faith in setting its rates, Redbox demanded information on the rates that AIG has paid to defend insureds in other similar cases, and what rates AIG pays counsel in coverage cases where it has to defend itself.  AIG naturally refused (what else would you expect?) asserting that the information is not relevant, that it is proprietary, and that compiling the information would be unduly burdensome.  AIG also attempted to limit the disclosure to the rates that the specific AIG unit that provided insurance to Redbox (National Union) pays, rather than AIG as a whole.

The court rejected all of these arguments.  First, the court held that AIG had opened the door to discovery of rates paid by AIG and all of its subsidiaries by admitting that there is an AIG-wide committee that evaluates law-firm qualifications and sets panel rates.  Second, the court held that nothing in the policy permitted AIG to unilaterally or unreasonably set rates paid to defense counsel, invoking not only Washington law that circumscribes insurer control of defense counsel, but also the duty of good faith and fair dealing (the subject of a recent post on this blog).  Third, the court held that AIG had failed to put in competent evidence that disclosure of the rate information would assist its competitors, and that an existing protective order would be sufficient to shield the information from public disclosure.  Overall, the court showed little patience with the insurance companies' bob-and-weave approach to disclosing critical information.

This decision is an important strike in the ongoing campaign by policyholder advocates to pull back the curtain on insurance company internal business practices that disadvantage insureds and allow insurers to profit.

Court of Appeals: Insured Cannot Place Extra-contractual Conditions on Compliance with Policy

When an insurance policy requires the insured to provide information to the insurer, may the insured demand that the insurer enter into a confidentiality agreement, even when the request from the insurer is reasonable?  Heck no, says the Oregon Court of Appeals in a new decision, Safeco v. Masood.  According to the decision, the policyholder suffered a fire loss and them, to add insult to injury, had personal items stolen from the home while the fire was being investigated.  Masood tendered the loss to his first-party carrier.  The carrier demanded all kinds of information from Masood about the missing items.  Although Masood did not contest the information request itself, he sought to have the insurer sign a confidentiality agreement restricting its use of the information.  The carrier refused.

The insured contended that the terms of the policy requiring the insured to provide information did not preclude a separate confidentiality agreement, and that the carrier's duty of good faith and fair dealing (inherent in every contract, under Oregon law) required the insurer to enter into a confidentiality agreement where the insured had a good reason for it.

The Court of Appeals pointed out a few important facts: the policy stated that the insured "must" provide the information requested by the carrier; the insured did not contend that the scope of the insurer's request for information was unreasonably broad (although it certainly appeared to be); and the insurer was already by law and other legal principles not to disclose or misuse the insured's information.  The Court of Appeals held, therefore, that what the insured was demanding was not only entirely outside of the terms of the policy but also beyond  the carrier's duty of good faith and fair dealing.

The court appears to have taken some care to limit its holding to this set of facts, and it seems unlikely that this case will have much impact, if any, on the approach taken by Oregon courts in the majority of cases, because most cases in which the duty of good faith and fair dealing is invoked involve much closer questions of the insurer's duties.

Insurers Trying to Have It Both Ways on 'First Party' v 'Third Party'

Insurance carrier-side lawyers are celebrating the result in Cox v. Continental Casualty Company, a decision out of the Western District of Washington  in which Judge Pechman held that Washington's Insurance Fair Conduct Act (IFCA) does not apply to claims under liability policies because the policyholder there is not a "first-party claimant," and IFCA specifically refers to "first-party claimants" as the class the statute is intended to protect.  The Cox lawsuit was brought by a group of allegedly injured patients of a dentist who sued the dentist and then took an assignment of  the dentists claims against his malpractice carriers as partial satisfaction of their malpractice claims.  Malpractice insurance is simply one variety of liability insurance, sometimes referred to as "third-party insurance" because it is designed to protect the policyholder against claims brought by "third-party" others (that is, a party other than the two parties to the insurance contract: a "third" party).

In Cox the court took it upon itself to consider whether IFCA's purported limitation to "first-party claimants" means that all claims other than those by policyholders under traditional "first-party" insurance (such as fire insurance, or inland marine insurance) are outside the scope of the statute.  Judge Pechman held that IFCA only encompasses traditional "first party coverage"  insurance relationships, and not liability policies in which policy proceeds are paid to others.  In denying reconsideration of that initial ruling, the court ignored evidence presented by the policyholder that this is not the proper interpretation, including ambiguities in the language of the statute, the fact that liability coverage is often referred to as "indemnity" coverage, and that cases from Washington federal and state courts have applied IFCA to "third-party coverage" situations.  The trial court's decision is wrong, is in the minority, and is likely to be overturned if appealed.  

But for a contrasting view from the insurance industry itself, consider NW Pipe v. RLI Insurance.  NW Pipe is an environmental coverage case from Oregon involving a dispute between one of the larger corporate targets at the Portland Harbor Superfund Site and its primary-layer liability ("third-party") insurer.  The crux of the dispute is whether the limits of the primary-layer policies have been exhausted, meaning that the insurer is off the hook for defense costs.  In NW Pipe the insurer paid for a lot of cleanup-type work on the insured's property, the payment of which clearly eroded some of the limits of the policies.  But those limits were not fully eroded, and it appears that the insured intentionally did not have the insurance company pay for some items to prevent the policies from being exhausted.  Still, the carrier wanted out of its defense obligation, so it sent the insured a check for the balance of the limits (which the insured wisely refused to cash). The insurer then argued to the court that it could force the insured to take the insurance company's money to pay for things that the insured had not asked to be paid for, so that the policies would be exhausted.  You can see where I'm going here: the insurance company in NW Pipe was clearly unconcerned with the "third-party" aspect of this insurance policy (that is, protecting its insured against claims by others) and was completely focused on paying out small benefits to its policyholder in order to further the insurer's larger financial goals.

The insurance industry knows full well that the distinction relied on by Judge Pechman in Cox is only semantic, that liability coverage is fully as much for the benefit of the policyholder as fire insurance, and that policy proceeds in liability coverage are frequently paid directly to the insured.  NW Pipe is but one example.  Hopefully an appeals court will get a crack at the Cox decision and turn it around.

Ninth Circuit Certifies Notice-Prejudice Question to Montana Supremes

One of the perennial issues in insurance coverage is what happens if a policyholder provides notice to its insurance company late - in the case of liability coverage, that usually means after the underlying case has been litigated for a long time, and sometimes gone to verdict, or been settled.  Most states have adopted the "notice-prejudice" rule for those situations.  The basic concept is this: if the insurance company wants to get completely off the hook for any obligation to pay defense costs or indemnity, based on language in the policy obligating the policyholder to provide notice "as soon as practicable" or similar, the insurance company has to show that it suffered in some way by the late notice, e.g. that it could have negotiated a better deal, litigated the case differently, paid less for defense costs.

Montana's lead case on this subject, according to the Ninth Circuit, contains language that both suggests that notice-prejudice is the standard and also that timely notice is a condition precedent to coverage, meaning that late notice bars coverage with no showing of prejudice needed.  The case, Atlantic Casualty v. Greytak, appears to have been  a fairly typical construction defect suit at the outset, but with a twist: the insurance company was not notified until almost a year after the defect claims were made and after the parties had entered into a covenant-judgment type lawsuit.  Those are not very sympathetic facts on which to argue for the notice-prejudice rule.  It will be interesting to see if Montana's Supreme Court takes the case.

Oregon Class Action Filed Against Regence BCBS Over Non-Profit Status

In a follow-on to a much larger class action filed earlier this spring in Illinois against another Blue Cross/Blue Shield insurer group, the same Chicago law firm (along with an East Coast personal-injury firm) has turned its sights on Oregon's Regence Blue Cross/Blue Shield, accusing Regence of violating its own charter and Oregon law by funneling profits to executive bonuses and hoarding cash, rather than operating like a true non-profit.  This adds to the trouble that the "blues" find themselves in from a ruling two days ago in the BCBS Antitrust MDL proceeding in federal court in Alabama, in which Judge Proctor denied the BCBS' motion to dismiss the allegations that BCBS conspires on a national level to squelch competition in the health insurance market.  The Oregon class action suit likely faces similar challenges on a procedural level before the merits are addressed, meaning that even if the suit proceeds forward, it is unlikely to have any short-term impact on health insurance rates in Oregon.

Fifth Circuit Certifies Whether "PRP" Letter Is a "Suit" to Texas Supreme Court

A new development, of sorts, in development of state law on whether a PRP letter constitutes a "suit" under legacy long-tail CGL policies: the Fifth Circuit has certified the question over to the Texas Supreme Court in McGinnes v. Phoenix Insurance.  Texas remains as one of the few states not to have addressed the question.  Most states have answered in the affirmative; a few have said "no."  Indeed the federal district court in McGinnes appears to have sided with the minority, holding that because CERCLA did not exist when the policies were issued, the parties could not have intended that the definition of "suit" would be broad enough to encompass administrative actions like a PRP letter.  That approach begs the question whether a policy should be interpreted based on modern "lay" understandings of terms, or based on lay understanding at the time of the policy.  Most courts (including Oregon) interpret GL policies -- which, after all, never "expire" -- based on current versions of the dictionary.  But the way the Fifth Circuit phrased the insurer's view on Texas law suggests that Texas law may be different, or at least may be open on that point.  As a very large state with a lot of industrial activity, Texas cases tend to get cited a lot and can have an outsized impact on insurance industry litigation strategy nationally.  The Texas Supreme Court is not required to accept the referral, so we will follow this to see what develops.

Update: The Texas Supreme Court has accepted the certified questions.

Nevada Supreme Court Knocks It Out of the Park on Pollution Exclusion

We are venturing a little afield from the Pacific Northwest today to acknowledge a big win for policyholders in Nevada.  The Nevada Supreme Court in CENTURY SURETY COMPANY v. CASINO WEST INC, answering questions certified to it in 2012 by the Ninth Circuit (after oral argument was held back in 2011), held that the so-called "absolute" pollution exclusion is not in fact "absolute" when it comes to non-"traditional" pollutants.

The facts of this case are very sad: four people died in a hotel room situated over a pool heater room when carbon monoxide filled the room, due to a blocked fresh-air intake.  The carrier denied coverage based on the pollution exclusion and an "indoor air quality" exclusion.  (That "indoor-air" exclusion is not typical, and therefore I won't discuss it here).  The federal trial court denied the carrier's motion for summary judgment, finding that both exclusions were ambiguous.  However, the trial court (and then the Ninth Circuit) noted that there is a considerable split among the states on whether the modern pollution exclusion applies only to traditional pollutants or covers all substances arguably within the broad scope of its wording, but that the courts could not determine how the Nevada courts would come down in that debate.

The Nevada Supreme Court put itself firmly in the pro-policyholder camp, using an analysis that could have been lifted from some of the best Oregon case law on policy interpretation.  The court first emphasized that insurance policies are interpreted from the perspective of the ordinary purchaser of insurance, not a lawyer or insurance professional.  Second, the court emphasized that any ambiguity in a policy -- whether on its face or when applied to a factual situation -- is resolved against the drafter (the insurer) and that exclusions are read very narrowly, with the burden on the insurer to establish application.

With that, the court observed that although it would be reasonable to read the pollution exclusion as broadly applying, and including carbon monoxide, it would also be reasonable to take the policyholder's view that it only covers "traditional," outdoor, pollutants.  The court noted that the exclusion is worded so broadly (using, for example, the term "irritants") that it could potentially apply to any substance including soap or shampoo, barring coverage for any accident involving such common, and usually innocuous, items.  The court also noted that dictionary definitions of "pollutant" are narrower than the exclusion and implicitly refer only to "traditional" pollution.  Finally, the court looked to the exclusion's drafting history, noting that it was put in place largely in reaction to the proliferation of environmental contamination statutes (like CERCLA).  The court therefore found the exclusion ambiguous and adopted the policyholder's proposed interpretation, meaning that the carrier cannot rely on the exclusion.

The Nevada court's decision is similar in many ways to the seminal Oregon case on the subject, A-1 Sandblasting & Steamcleaning Co., Inc. v. Baiden, 53 Or. App. 890, 894, 632 P.2d 1377 (1981), aff’d, 643 P.2d 1260 (Or. 1982), in which the Oregon Court of Appeals held that paint was not within the ambit of the exclusion, and found the exclusion ambiguous.  Nevertheless, insurers in Oregon continue to deny indemnity coverage -- and sometimes even a defense -- based on a broad interpretation of the pollution exclusion, perhaps because the exclusion is written so broadly and because so many other courts have applied the exclusion broadly.  (Which again points to the need for additional disincentives in Oregon law for carriers to deny claims first to see if the insured will complain.)  This new decision will make it more dangerous for carriers to take that approach, at least in Nevada.

Wash. Court of Appeals Gets It Dead Wrong on What Is a "Suit"

Earlier this week Division One of the Washington Court of Appeals issued its much-anticipated decision in the Gull Industries v. State Farm litigation.  The issue was whether a letter from the state equivalent of the EPA constitutes a "suit" under a standard-form legacy GL policy (that is, a policy issued before the ISO form defined "suit").  Only if something constitutes a "suit" does the insurer have a duty to defend, which in the environmental context often means paying for very expensive investigations and studies of contamination and remediation options.  So there is potentially a lot at stake.

One word describes this Court of Appeals decision: wrong.  Confusingly enough, the decision starts off in the right direction, finding that the term "suit," undefined, is ambiguous.  That's in keeping with that other courts have found, including Oregon's courts.  That's where the decision falls apart: having found an ambiguity, the court should have applied the maxim that ambiguous terms are applied against the drafter (the insurer).  But without any discussion of that standard, rather than adopting a broad, policyholder-friendly interpretation, the court imposed a definition not drawn from any source reflecting the view of an ordinary purchaser of insurance (like the dictionary); rather, the court looked to what other courts had adopted as an interpretation, and picked and chose among aspects of those decisions that it preferred.  The interpretation adopted by the Court of Appeals for "suit" is this: something that "communicate[s] an explicit or implicit threat of immediate and severe consequences" if not responded to and is "adversarial or coercive in nature."

The letter sent by Ecology (the Washington state equivalent of EPA) was in response to a voluntary notification by the policyholder that pollution had been discovered and would be cleaned up.  Ecology told the insured, in response, that it was placing the site on a list of contaminated sites awaiting cleanup.  The letter did not explicitly tell the insured to do anything.  But, as noted by the court, the letter advised the insured that there were specific requirements in state law that cleanup efforts must adhere to.  Implied in that statement is the threat, drawn from the cleanup-requirements statute, that if those standards were not complied with, there will be enforcement action.  But the Court of Appeals completely ignored that reality, simply saying that the letter "did not advise" the insured of those consequences.

The approach taken by Division One has been rejected by many courts, including the Ninth Circuit in Anderson Bros. v. St. Paul Fire & Marine.  In Anderson Brothers the Ninth Circuit affirmed its observation in Aetna Cas. & Sur. v. Pintlar, that the realities of environmental statutes must be considered in deciding whether a communication from a regulatory agency that does not spell out every potential liability or ramification is a "suit."  In Gull Industries the reality was that the the insured, after self-reporting the contamination, was going to constantly be looking over its shoulder to see what Ecology thought of what it was doing.  That makes Ecology's letter a "suit."

The practical effect of decisions like this one is to discourage policyholders from voluntarily entering into agreements with regulators or self-reporting contamination and cleanup efforts.  Instead, policyholders are encouraged to bait regulators into taking explicitly "adversarial or coercive" steps.  That's bad for the environment and bad for the public.  It may be that the Court of Appeals was trying to goad Ecology into changing the wording of its letters, but there's no reason that the burden of solving this problem should be put in the hands of environmental regulators.  This may be a rare circumstance where Washington legislators and policyholder advocates can take a page from Oregon, and enact a Washington version of the Oregon Environmental Cleanup Assistance Act, which (as some of my colleagues have noted) contains a definition of the term "suit" that much broader than the standard adopted by the Washington court.

Contempt Proceeding on Appeal Part of Underlying Claim for Purposes of Claims-Made Coverage

A federal judge in the Western District of Washington recently addressed a very uncommon issue in coverage litigation - whether a contempt proceeding is a new "claim" for purposes of a "claims-made" policy - that has resonance for a common issue in risk management: when to report a claim.  In Great American Insurance Company v. Sea Shepherd Conservation Society the policyholder -- a conservation group -- was sued by a Japanese whale "research" organization to stop the group from interfering with whale "research" in the Pacific ocean.  The trial court denied a request for an injunction, whereupon the group planned to set to sea and interfere with the "research."  But the appeals court reversed and granted an injunction.  The group stopped its planning, but some members of the group participated in some foreign organizations' efforts at sea, leading to a contempt motion being filed in the appellate court, naming some additional parties and alleging (obviously) violation of the restraining order.  The appellate court set up a whole new proceeding to adjudicate the contempt issue, before the court commissioner.  That process is still going on.



Sea Shepherd did not tender the claim until the contempt proceeding was initiated.  The court held that although the contempt proceeding related to new facts, involved some additional parties, and was proceeding in a new forum (the appeals court), it was part of the original lawsuit, which qualified as a "claim" under the policy.  Because the policy required that a claim be reported during the policy period or (at least) within 90 days of the end of the policy period, the court held that there was no duty to defend Sea Shepherd.



These are highly unusual facts so not too many lessons can be drawn from this case.  One take-away, however: when trouble arises in a business, carefully consider, at every turn, whether what has happened is a claim to be reported or even just a "circumstance" that should be reported (a "notice of circumstance").  It is very unusual that a business gets in trouble for over-reporting a claim; it is much more usual, as in this case, for the opposite to be true.

Another Strong Ruling on Prejudgment Interest From Oregon's Federal Courts

Oregon's federal court has struck another blow against the insurance industry's attempts to limit prejudgment interest in duty-to-defend disputes.  Somewhat ironically, this ruling comes a case that has turned into a carrier v. carrier fight over contribution.

In the latest ruling in the long-running Northwest Pipe v. RLI coverage litigation, the court held that a non-defending carrier had to pay prejudgment interest to the defending carriers based on when the defense costs were paid, irrespective of when demand was made for reimbursement.  The non-defending carrier argued that it did not know, until demand was made on it, what the defense costs were.  The court rejected that argument, reasoning that if the carrier had not breached its contract and had agreed to defend, it would have been aware of the defense costs as they were being paid.

This new decision echoes Judge Hernandez' ruling in the Ash Grove litigation, which awarded prejudgment interest from when the policyholder paid the defense costs, without regard for when the insurance companies learned of the defense costs.

Washington Court Affirms Bad Faith Verdict In Excess of Stipulated Judgment

Clarifying Washington law, Division I of the Washington Court of Appeals has held that a jury is not limited in what it awards on a bad faith claim to the amount that the policyholder and the claimant had agreed to as the judgment in the underlying dispute.  The set up: in Miller v. Kenny a young driver crashed his car injuring himself and three passengers (the car actually belonged to one of the passengers).  Driver's insurer, Safeco, played games with policy limits and its evaluation of the case, putting the insured at risk of a significant judgment against him well in excess of policy limits.  The insured driver and one of the passengers agreed to a stipulated judgment against the insured that was over policy limits, with an assignment of the insured's claims against Safeco to the passenger, and a covenant that the passenger would not seek to enforce the judgment except to the extent of the passenger's rights against Safeco.  The parties followed Washington's procedures for a reasonableness hearing, and it appears that Safeco did not contest the reasonableness of the covenant judgment.  The judgment was for $4.15 million (exclusive of the policy limits, which Safeco paid).

But at the bad faith hearing the passenger, as assignee of  the policyholder's bad faith claim, put on evidence of damage to the driver caused by Safeco's bad faith that went well beyond the amount of the covenant judgment.  The jury ended up awarding the passenger/assignee $13 million, inclusive of the covenant judgment amount.  Post-trial the court added prejudgment interest, postjudgment interest, and attorney fees, and some of the damages award was trebled under the Consumer Protection Act. The final judgment was for $21,837,286.73.


On appeal, Safeco argued that under Besel v. Viking Ins. Co. of Wisc., 146 Wn.2d 730, 736, 49 P.3d 887 (2002), which held that the amount of a covenant judgment, when found to be reasonable, is the “presumptive measure of the insured's harm,” the jury cannot award more than the amount of the covenant judgment.  Not so, said the Court of Appeals in Miller; the covenant judgment is the presumptive floor to the insured's harm, but not a ceiling.  The Miller court went on to describe the different kinds of harm that the insured can suffer which may be provenin a bad faith action, above and beyond the covenant judgment amount:  damage to "credit rating, damage to reputation, loss of business opportunities, loss of control of the case..., loss of interest, attorney fees and costs, financial penalties for delayed payments, and emotional distress, anxiety, and fear."

Miller is an important milepost in Washington's evolving judicial recognition of the extraordinary power that liability insurers have over the lives of  their insureds, and the catastrophic harm that insurers can cause when they try to play things close to the vest in order to save themselves some money.  Miller may have the unfortunate effect of motivating carriers to contest reasonableness hearings, in order to get an early shot at reducing the net recovery on  a bad faith claim.  In the end, that will be a small price to pay for the benefits of this case (assuming that Miller is upheld by the Washington Supreme Court). 

Schnitzer Verdict In Defense Cost Dispute Good News for All Policyholders

Late last month a jury awarded Schnitzer Steel all of the damages that it sought -- over $8 million -- in a coverage dispute with its liability carriers that centered on the rate being paid the environmental lawyers defending Schnitzer at the Portland Harbor Superfund Site.  This is a very unusual case, but it is likely to have a ripple effect on the insurer-insured dynamic when it comes to selection of defense counsel.  At the heart of the dispute was whether Schnitzer's defending carriers had the right to choose defense counsel, even if the insured believed those lawyers did not have the experience or ability to properly handle the case. Schnitzer's insurers, like most insurers, asserted that they had a nearly unfettered right to choose counsel, and took the position that if the insured insisted on another lawyer the carrier did not need to pay any more than the "panel counsel" rate.  The jury in Schnitzer rejected that argument.  The company recovered the difference between what it has been paying its California-based counsel (at rates nearing $900 per hour) and what its carriers had agreed to pay (roughly $250 per hour) for several years worth of intensive work.

As is usually the case one of the biggest fights was over the jury instructions, which embody the judge's conclusions about the governing law.  I have posted the jury instructions here.  Although the court ruled before trial that the recent amendments to the Oregon Environmental Cleanup Assistance Act (OECAA) relating to standards for "independent counsel" did not apply, the court nevertheless gave the jury an instruction on an insurer's obligations regarding defense counsel that is nearly identical to the statutory standard.  This instruction will give insured's ammunition to use with carriers attempting to foist "panel counsel" on the insured.  In most cases appointed panel counsel are excellent specialists in their fields, but on occasion a carrier will attempt to appoint someone who does not have the requisite experience, or has a particular conflict of interest (such as having represented the carrier on coverage matters).

More generally, the verdict should make carriers particularly leery about going in front of a jury in state or federal court.  The simple fact is that although Schnitzer had very excellent representation, many did not believe that they could convince a jury that a lawyer is worth $900 an hour, under any circumstances.  The fact that they were able to do so certainly speaks to their skill as advocates, but probably also speaks volumes about how juries view insurance companies that try to skirt their coverage obligations.

Oregon Federal Court Confirms Availability of Prejudgment Interest on Disputed Defense Costs

In an as-yet-unpublished decision in the long-running Ash Grove v. Liberty Mutual case the court recently granted the policyholder's request for prejudgment interest on defense costs recovered at trial.  Ash Grove (Case No. 09-239-HZ) involves reimbursement of legal fees and costs incurred in defense of claims associated with the Portland Harbor Superfund Site.  After pretrial rulings established that Ash Grove's carriers had a duty to defend, the case went to trial nearly a year ago on some remaining issues about the scope of the duty to defend, and damages.  Following a bench trial, the court held that the carriers' duty to defend began in January, 2008, when notice was initially given.  The court awarded Ash Grove over $1.8 million in defense costs from that point through the end of 2012.

In a post-trial motion, Ash Grove asked the court to award prejudgment interest at the statutory rate (9%) running from the date that the company paid each of the monthly invoices.  This was an issue of first impression in Oregon, at least on these facts.  Nationally, some courts had held  that where an insurance carrier contests the reasonableness of defense costs, the amount is not "readily ascertainable" (which is the near-universal test for awarding prejudgment interest) until the court has resolved those disputed issues, and thus prejudgment interest cannot be awarded.  That was the situation in Ash Grove - the carriers hotly contested nearly all of the company's defense costs.  The Ash Grove trial court rejected the carriers' view, instead siding with a contrary line of cases holding that a carrier's contentions about reasonableness of defense costs does not make the amount not "reasonably ascertainable."  The Ash Grove court also noted that without an award of prejudgment interest the policyholder would not be made whole.

Previously, the only cases in Oregon in which the court had awarded prejudgment interest on defense costs occurred in cases in which the reasonableness of  defense costs was not disputed.  This new ruling should increase the pressure on carriers to settle disputes over defense costs before trial.

Note: We have been privileged to act as local counsel for Ash Grove in this case.  Past results in any particular are no guarantee of future performance or result in any other case.  Neither this posting nor any other posting in this blog should be taken as legal advice.  See other disclaimers at bottom.

Policyholder Counsel Should Welcome Changes to Proposed Revisions to FRCPs - But Still Push For Rejection

The Advisory Committee on Civil Rules recommends changes to the Federal Rules of Civil Procedure to the federal Judicial Conference.  For several years that body has been debating proposals to curb perceived discovery abuses (particularly in the area of e-discovery sanctions) and to bring down the cost of discovery in civil litigation overall.  On the discovery side, initial drafts of the proposed amendments included changes to the presumptive number of interrogatories, requests for admission, number of depositions, and the length of depositions.

As reported in various places incuding the K&L Gates' e-discovery blog the committee, which is having a final meeting on these rules here in Portland starting tomorrow, has largely dropped these proposals following significant opposition from many quarters including comments by law professors and various segments of the bar.  However, the committee is still promoting a dramatic change to Rule 26's foundational rule on the scope of discovery which would put the burden on the requesting party to justify discovery requests as being "proportional" to the case.  As articulated in comments  by policyholder counsel, this change will disadvantage businesses (and individuals) in litigation with insurance companies, where it is usually the "little guy" (the policyholder) who is trying to penetrate layer upon layer of insurance company bureaucracy to find the truth.  This often requires multiple rounds of discovery requests, multiple depositions and a lot of other types of digging.

So while it is good news that the committee has withdrawn the changes on discovery tools, the overall proposed change to Rule 26 is still cause for concern.  Unfortunately, opportunities for public input are limited after this point - the issue may become fodder for an unusual public fight in the Congress over the federal rules.

Twenty Questions to Ask Coverage Counsel In Business Litigation

The American Bar Association's Business Torts committee has posted an excellent article (registration, ABA membership required) on the 20 questions that a business owner should ask coverage counsel about potential coverage issues arising from business litigation.  These are the most critical, and often ignored, issues that must be considered when making decisions about coverage strategy.  Included among these are whether the insurer has the right to "recoup" defense costs that it pays if it is later determined that there is no indemnity coverage, and whether the insurer is entitled to receive attorney-client communications and what impact that might have on waiver issues.  Because the law on almost all of these issues varies state to state, businesses that get involved in litigation in multiple states may need to revisit these issues in each piece of litigation.  (Even where all policies are purchased in the same state, choice-of-law principles may not permit the law of that state to govern all coverage issues).  A very nicely done article!

Oregon Federal Court Rules on Characterization of Environmental Cleanup Costs

Last week Magistrate Judge Stewart issued an order on the thorny issue of how to characterize some of the costs associated with a complex environmental cleanup.  Are they indemnity costs that deplete the insured's insurance policies, or are they defense costs, which do not?  The decision resolves yet more issues in the Siltronic litigation between Siltronic, a major player at the Portland Harbor Superfund Site, its primary layer carriers (principally Wausau), and excess carrier AIG.  Siltronic has had to perform some cleanup-type work and extensive studies and monitoring at its facilities, well in advance of any cleanup of the contaminated sediment in the Willamette River that is the focus of the site.

Under the Oregon Environmental Cleanup Assistance Act's 2003 amendments certain investigatory costs are presumptively deemed "defense" costs, whereas some types of remedial costs are presumptively deemed "indemnity" costs.  But environmental sites are notoriously complex and what seems like remediation to some can look like further investigation to others.  In Siltronic the company and its primary-layer carriers reached an agreement on an allocation of the costs in such a way that the primary policy was exhausted, meaning that the excess carrier (AIG) would be on the hook.  AIG challenged the allocation, arguing that the primary carrier had designated many costs as indemnity that should have been defense.

Judge Stewart's decision is quite nuanced and deserves a close read.  Overall, her approach was to go behind the labels applied by the agencies, vendors, or attorneys to look at what was actually going on when a particular cost was incurred and its purpose, to see whether the statutory presumptions had been overcome (or whether they applied at all).  This decision is something of a harbinger for what will likely be significant disputes between policyholders, their primary carriers, and excess carriers when the "big" remediation at the Portland Harbor begins in earnest.

Oregon Bill That Would Assist Insurers In "Lost-Policy" Battles Dies

Those of us in the coverage game who deal with "long-tail" claims -- that is, claims under older occurrence-based policies -- routinely have to deal with a common problem: the policies are gone.  Businesses destroy old records, change hands, have a flood, etc., and the old insurance policies are gone.  Professional records managers are now trained to keep insurance policies forever and many have digitized their insurance archives.  But for those without such an archive the "lost-policy" battle with the insurance company (and often multiple carriers) can turn into a real bruiser.

This year the insurance industry proposed an innocuous-seeming bill in the Oregon legislature that would have permitted insurance companies to unilaterally cease sending the full copy of a new insurance policy to the policyholder, instead giving the policyholder a link to the policy forms hosted on the carrier's website.  The bill would have only required the carrier to keep the link live for the term of the policy, and would have only required the policy to be archived for ten years.  This bill appeared to have been part of a nationwide push by industry to save money, and trees (a laudable goal), by delivering policies electronically.  The difference in the Oregon bill, however, was that it did not permit policyholders to choose not to participate in the new scheme - every other piece of legislation that I could find required the policyholder to "opt in" before the carrier was excused from doing things the "old-fashioned" way.

I penned a letter to the chair of a Senate committee hearing this bill, available here, and testified against the bill.  More detail on the problems that I saw with the bill, and in particular the further leg-up that it would give insurers in future lost-policy battles, is in the letter.  The bill stalled in committee and died with the end of the short session.

This is a good example of how even small, seemingly insignificant, and possibly well-intentioned changes to the insurance code can have unforeseen repercussions in insurance coverage disputes.  Hopefully now that the policyholder bar is a bit more organized we can engage the industry on every change, not just the big ones.

Washington Federal Court: Insurer Cannot Litigate Contested Issues In Declaratory Judgment While Underlying Case Pending

With characteristic good humor, Judge Robart of the Western District of Washington recently reiterated a very important principle in the resolution of duty to defend issues: the insurance carrier may not seek a determination on the duty to defend while the underlying case is still going on if in doing so the court would be asked to make rulings that have any potential to prejudice the insured's defense of the underlying case.  You can find the decision here.  In thecase a law firm was sued by a former client over mishandling of discovery in a workplace injury case that resulted in the former client being sanctioned (and the lawyer involved being disciplined by the bar).  The firm's malpractice carrier agreed to defend but "reserved its right" to file a declaratory judgment action to determine whether certain potential exclusions precluded coverage, thus absolving it of the duty to defend.  Judge Robart solicited briefing from the parties as to how he might decide the carrier's contentions without prejudicing the defense of the underlying case.  But, as he noted, even the best laid plans of judges often go awry: the briefing only confirmed that because there were significant disputes of fact and law between the carrier and the law firm, including about when the firm "knew" about the discovery misconduct, continued litigation of the coverage dispute could prejudice the law firm's defense.  Therefore the court granted the law firm's motion to stay the case until after the underlying dispute resolved.  The lesson for policyholders is that although the standard admonition to carriers is to pick up the defense and then file a declaratory judgment action to resolve duty to defend issues, the carrier should not be permitted to always do so. 

Insured's Online Research Not Recoverable as Costs, Court Punts on Whether Recoverable as Fees

The Oregon Court of Appeals has once again confirmed that computerized legal research costs (Westlaw, Lexis, etc.) are not recoverable as costs under state law (in this case, the state law permitting recovery of costs on appeal), in a case arising out of a dispute over a homeowner's insurance policy.  The policyholder apparently argued that under the court's prior holdings awarding such research costs where a statute permits recovery of attorney fees.  Not so fast, noted the court: the policyholder didn't ask for research costs as fees, she asked for them as costs.  The court therefore declined to decide whether computerized legal research costs are recoverable as fees under ORS 742.061.  Although a small issue in the scheme of things, recovery of research costs in coverage cases is important because relatively few coverage issues have been addressed by the Oregon courts, requiring counsel to research out-of-state legal developments in order to render effective representation to policyholder clients.

In Case You Missed It - 2013 Wrap Up of Portland Harbor Coverage Cases

I am making an effort to get onto this blog every case of recent vintage touching on important coverage issues associated with the Portland Harbor Superfund Site (and there have been a lot of them).  Here's one from just before I started this blog last year - Siltronic Corp. v. Employers Ins. Co. of Wausau, 921 F. Supp. 2d 1099 (D. Or. 2013).  In this decision, Magistrate Judge Stewart (by consent of the parties) granted summary judgement in the insurer's favor on the issue of whether cleanup costs paid before there was a final agreement with DEQ/EPA on Siltronic's obligations exhausted the policy limits, thereby excusing any additional defense obligation.  Judge Stewart characterized Siltronic's argument as trying to add the term "final" to the exhaustion clause -- "exhaustion by payment of judgments or settlements" -- and rejected it, looking to Washington and Texas court decisions for guidance on what constitutes such payments in the environmental arena.  Somewhat ironically (given that this argument usually benefits the policyholder in a duty to defend dispute) Judge Stewart gave strong recognition to the somewhat unique structure of environmental "suits" as part of the decision.

'via Blog this'

Carrier Must Show Prejudice to Rely on Late Notice

Federal judge Anna Brown recently confirmed that under Oregon law, a carrier must demonstrate that it was prejudiced by allegedly late notice of a claim before the court will inquire into whether the delay in providing notice was reasonable.  This case arose from a collision between a commercial vehicle and a train in Texas allegedly caused by the policyholder, whose auto-insurance policy was governed by Oregon law.  The policyholder waited for eight months before notifying her carrier that she had been sued in connection with the accident.  The carrier claimed that because the delay was unreasonable, there was a presumption of prejudice.  But as Judge Browns recognized, that is not Oregon law.  Because the carrier did not put forward any evidence that it had been prejudiced by the delay, the court rejected the carrier's motion for summary judgment on whether it had a duty to defend, due to late notice.  This case is another reminder that Oregon law is, in some respects, much more policyholder-friendly than other states' law, and that "technical" defenses such as late notice rarely get much traction.

It is worth noting that Judge Brown also rejected the carrier's more substantive argument against there being a defense obligation, finding that although the allegations of wrongdoing in the underlying case did not directly implicate the use of the vehicle, they indirectly referred to it.  Therefore, under Oregon's generous duty-to-defend standard, most recently explained in Bresee Homes v. Farmers, the carrier is on the hook for the defense.

Adjuster Read Canceled Policy, Denied Claim, Committed Bad Faith

One assumption that even many commercial-lines policyholders make is to assume that the insurance adjuster that they are dealing with is an "expert" on their insurance coverage (ref. "You're in good hands...").  As if anyone needed one more example that that simply is not a safe assumption to make, read in disbelief the case linked below, from Judge Suko in the Eastern District of Washington.  The insured tendered a massive lawsuit to its carrier, whose adjuster apparently read only a canceled policy form as part of his "investigation" prior to denial, and did not catch the fact that coverage was specifically provided by an endorsement to other policies.  Judge Suko very property found that reviewing the wrong policy is per-se bad faith on the part of an insurer.  Fortunately, in Washington the insured is at least in a position to be fairly compensated in extra-contractual damages for that kind of behavior, through Washington's robust bad-faith set of laws.  In Oregon, the story would be different, unfortunately.

DYE SEED, INC. v. FARMLAND MUTUAL INSURANCE COMPANY, Dist. Court, ED Washington 2013 - Google Scholar:

'via Blog this'