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.